Closing Delaware loophole, instituting worldwide combined reporting would level the playing field for small businesses and generate over $700 million a year to invest in PA communities
HARRISBURG — The PA Budget and Policy Center today released a report that calculates Pennsylvania now loses $4.2 billion annually due to massive corporate tax cuts since 2002. In 2006-07, corporate tax cuts cost the state of Pennsylvania nearly $1 billion. Last year, that number ballooned to $4.2 billion. Meanwhile, things like our public education system, infrastructure, and critical human services programs are chronically underfunded. The report comes ahead of a PA Senate Democratic Policy Committee hearing this Wednesday, January 27 on corporate tax reform. The hearing will take place at 1:30 PM in the North Office Building, Hearing Room 1.
According to the report, these corporate tax cuts do not result in significant payoff for jobs and the economy for two specific reasons:
1. State and local corporate taxes represent too small a share of corporate costs to have a significant effect on business location. Other factors such as workforce quality and proximity to customers, suppliers, and raw materials outweigh corporate tax rates. Second,
2. Because of Pennsylvania’s balanced-budget requirements, cuts in corporate tax rates often lead to spending cuts, which make the net effect of tax and spending changes zero or negative.
In order to rectify this problem, while sparing mom and pop small businesses, the report authors recommend the state enact “combined reporting” — often called closing the “Delaware loophole.”
Combined reporting would get rid of a major loophole that allows seventy-three percent of corporations doing business in Pennsylvania and subject to the corporate net income (CNI) tax to pay nothing. Under the current “separate company reporting” system, corporations pay taxes on only the profit they claim to make in Pennsylvania. But many large, multi-state and multi-national corporations cook their books to show little or no profit in Pennsylvania and thus pay no CNI tax.
“The Department of Revenue projects that instituting combined reporting for the corporate net income tax would bring in an additional $677 million in revenue by closing the Delaware Loophole,” the authors of the report conclude.
The report recommends Pennsylvania go beyond just “water’s edge” combined reporting, and instead suggests Pennsylvania put into effect “worldwide combined reporting,” Pennsylvania would tax the share of worldwide profits equal to the share of worldwide sales made here in the Commonwealth.
Recent estimates by ITEP suggest that taxing profits shifted from Pennsylvania abroad — via worldwide combined reporting—would bring in an additional $260 million beyond the revenue from reining in only intra-state tax avoiding.
“Pennsylvania is leaving important revenue on the table every year we don’t institute combined reporting for corporations,” said report co-author Diana Polson, a Policy Analyst at the PA Budget and Policy Center. “That hurts our schools, our infrastructure, our neighbors who are dealing with family members with an illness or disability, our environment—the list goes on. But these corporate tax loopholes also hurt mom and pop small businesses that pay the CNI, too. Those businesses don’t have the luxury of shifting the reporting of their profits to other states or countries. Closing the loopholes levels the playing field for small businesses and generates needed revenue to invest in our communities.”