December 17, 2012

PA Independent: PA Bill Eliminates Biz Tax Shelters, Lowers Biz Income Taxes

media mention

(Original Post)

Would close so-called “Delaware loophole”

January 29, 2012

By Stacy Brown | PA Independent

HARRISBURG — Two Pennsylvania state representatives, a Democrat and a Republican, are teaming up to produce a bill that would close the so-called Delaware loophole and potentially add up to $600 million annually in state income.

State House Policy Committee Chairman Dave Reed, R-Indiana, and state Rep. Eugene DePasquale,  D-York, are expected to outline their proposal at a news conference Wednesday in the statehouse

“We’re looking to even the playing field for all businesses, so that they will be able to compete on their own merits as opposed to competing against those who have high-paid tax attorneys and lawyers who can find loopholes,” Reed said Monday

The lawmakers said the proposal also would:

    Require more companies in Pennsylvania to pay the 9.99 percent corporate net income tax;
    Lower that tax from 9.99 percent to 6.99 percent.

 

Lawmakers could not provide exact figures for how much revenue would be lost because of the lower tax rate or gained from more businesses paying the income tax.

However, they anticipated the state would net millions in revenue, because about 75 percent of corporations in Pennsylvania are not paying the corporate net income tax because of the Delaware loophole.

The proposal would force all to pay, making up for at least some of the $500 million annual revenue officials said the state loses each year because of the loophole.

“We want to make the state business competitive and get rid of the loophole,” DePasquale said. “We want to improve the business friendliness of the state. In the long term, this will help attract more companies to Pennsylvania, because we will lower the corporate tax rate to 6.99 percent.”

By lowering the corporate tax rate, the proposal would lure more businesses to the state, thus having an impact on unemployment, Reed said.

“It’s all about workers getting jobs and collecting paychecks instead of collecting unemployment checks,” he said.

The Delaware loophole is used by some companies operating in Pennsylvania who set up a shell company in Delaware, which doesn’t tax franchise fees, intellectual property payments and other so-called passive income.

The shell company controls the trademarks, patents or other investments, and charges the parent corporation a royalty for using the trademarked name or patent.

This allows the corporation in Pennsylvania to treat the payment as a business expense, which it then deducts from its income, thereby reducing its tax burden in Pennsylvania.

For small businesses without interstate operations, the Delaware loophole is not an option. “This tax scam forces small businesses to shoulder a bigger share of the state tax  burden,” said Eric Epstein, founder of Rock The Capital, a political watchdog group based here.

In fact, the state Department of Revenue reported Pennsylvania taxpayers lost $493 million through the loophole or about 35 percent of the sum paid in state business taxes last year.

A study issued in 2011 by the Institute on Taxation and Economic Policy, a Washington, D.C.-based non-profit think tank that works on state and national tax policies, and Citizens for Tax Justice, a Washington, D.C.-based tax research group, said at least 14 Pennsylvania-based corporations failed to pay the 9.9 percent tax rate after deductions.

The study provided as one example the H.J. Heinz Co., the Pittsburgh-based ketchup maker, which had nearly $1.6 billion in profits from 2008 to 2010 and paid just $13 million in taxes, a rate of 0.8 percent.

If the company paid the 6.99 percent tax rate under the bill, the state would have generated more than $111 million in revenue.

The study estimated that the state loses about $500 million a year it could receive from businesses if not for the Delaware loophole.

Reed said past proposals during former Gov. Ed Rendell’s administration estimated that closing the loophole would generate between $500 million and $600 million in revenue annually.

“We are looking at a more narrow and focused view,” he said.” The state of Virginia did this and brought in between $30 million and $40 million, and we’re confident that we’ll bring in that amount in the first year.”

The fact that the proposal has bi-partisan support is a step in the right direction, DePasquale said.

Stephen Miskin, a spokesman for House Majority Leader Mike Turzai, R-Allegheny, said Turzai hadn’t seen any revenue projections about the plan, but the representative supports the proposal, because it would level the playing field for businesses in the state.

House Labor and Industry Committee Chairman Ron Miller, R-York, said he is waiting for more specifics before lending his support to the bill.

“We have to be careful that we don’t hurt any companies in Pennsylvania right now,” Miller said. “That’s my main concern.”

Lawmakers have been working for six months on this proposal, Miskin said.

Still, making legitimate businesses pay for a minority of bad business practices isn’t fair, said Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, based here, which represents businesses in the state.

“Companies do not owe Pennsylvania for their business operations outside the state. We will wait and see what the language is when the bill is introduced,” Barr said. “We know that over the years, Pennsylvania has had the worst business tax structure in the country, so we are anxious to see what comes up with this.”

Further, referring to the tax shelter as a loophole is a misnomer, said Kevin Shivers, president of the Pennsylvania chapter of the National Federation of Independent Businesses, based here, which represents small business owners.

“It seems to me that if I pay it, it’s a tax. But, if someone doesn’t pay it, it’s a loophole. We have to get away from liberal tax and spend philosophy that says if you tax people more the economy will be okay,” Shivers said. “The state needs to reduce structural impediments and reduce onerous burdens that punish job creation by making the tax code fair.”





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