Time to close the loop-hole
Pennsylvania is one of just a handful of states, and the only one in the Northeast, that allows corporations to legally evade corporate income taxes. Most other states have closed the primary evasion device, which is known as the Delaware Loophole.
Estimates of annual lost corporate tax revenue in Pennsylvania due to the loophole range up to $500 million. But the greater damage is that relatively few corporate entities are left to pay a high state corporate net income tax rate of 9.9 percent, when closing the loophole would enable the state government to reduce that rate by about 30 percent because the burden would be spread among many more payers.
Under the legal tax dodge, companies with facilities in Pennsylvania establish a "headquarters" in a no- or low-tax state, usually Delaware, which is sometimes little more than a one-person office or even a post-office box. Companies operating in Pennsylvania then pay massive "royalties" to the headquarters for use of patents, copyrights, brand names and so on, eliminating in-state tax liability.
There are several ways that the state could eliminate the loophole. The best is known as "combined reporting," which has been upheld by the U.S. Supreme Court and is employed by 21 states. It requires companies to report all of their profits from all states, enabling each state to tax the appropriate percentage of business conducted within each state.
There is no movement for that method in the state Legislature, unfortunately. Some state lawmakers want to use the other main method, known as addback, which is used by a dozen states. It requires companies to report what they spend on "intangible" expenses such as those inherent in the Delaware loopholes.
The state House passed an addback law this year but the bill itself is riddled with loopholes that will make it far less effective than combined reporting.
Meanwhile, some state senators are pondering an addback provision that is better than the House version, with projected revenue of $80 million a year, rather than the House projection of $40 million.
Ideally, both chambers would opt for more revenue and greater tax fairness through combined reporting. But as a step toward truly closing the loophole, the Senate approach is better than the House bill.