Time to stop the shifty paper shuffle
Just about everyone agrees that Pennsylvania's 9.9 percent corporate net income tax rate is too high - for those businesses that actually pay it.
There also never has been a secret about how to reduce that rate. Lawmakers need to close the so-called "Delaware loophole," by which many major corporations evade any Pennsylvania income tax liability. Doing so would more fairly distribute the corporate tax burden and cover the revenue that would be lost to the state by reducing the rate.
Simple enough, except in Harrisburg.
Under the Delaware loophole, a company sets up a corporate headquarters in a low- or no-tax state, often Delaware, even if the headquarters is just a post office box or a one-person office. The Pennsylvania subsidiary of that company then buys trademarks, copyrights or other proprietary items from the home office and reports the profits generated in Pennsylvania in the state of the home office, eliminating the Pennsylvania corporate net income tax bill. It is a paper shuffle that costs the treasury between $70 million and $100 million a year, according to state estimates.
Companies that don't set up shell offices in Delaware and other places end up paying the full 9.9 percent. Obviously, the state's objective should be to reduce the rate while maintaining the revenue stream by closing the loophole.
The state House passed a bill Monday that purports to do just that, but the Legislature can't simply pass a clean bill. The legislation has a loophole of its own that would reduce the corporate net income tax by 30 percent, to 6.9 percent, while enabling many corporations to continue their Pennsylvania tax avoidance.
An exception to the supposedly closed loophole would allow companies to use it for transactions "directly related to a valid business purpose."
"Any corporation that employs accountants who can't use that language to avoid taxation should really find a new CPA firm," said state Rep. Phyllis Mundy of Luzerne County.
The bill supposedly is revenue-neutral. But if companies exploit the new loophole, along with several other new corporate tax breaks in the bill, the state would lose about $900 million over 10 years - revenue that would have to be made up through service cuts, increases for other taxpayers, cost-shifts to local governments or all three.
Reducing the corporate net income tax is a worthy goal - one worthy enough to achieve in a straightforward manner that not only reduces the rate but fairly distributes the tax burden. This bill does not ensure that result. The Senate must see to both sides of the equation.