December 17, 2012

The Times Leader: Corporate tax topic of Mundy bill

media mention

It would deal with two key issues by lowering state corporate net income tax rate and closing some loopholes.

By Steve Mocarsky [email protected]

The debate about Pennsylvania’s high corporate taxes and how companies use loopholes to skirt them has been going on for years, but a bill that would address both issues has been languishing in committee for months.

In April, state Rep. Phyllis Mundy, D-Kingston, introduced House Bill 1396, which she says would close some loopholes and lower the state Corporate Net Income Tax rate by 2.5 percent over three years. But the bill hasn’t even been brought up for debate.

That might seem strange, given that many in the Republican majority have cited the state’s corporate tax rate of 9.9 percent – the second highest in the nation – as a reason for supporting an impact fee on Marcellus Shale gas drillers rather than a severance tax. State Rep. Tarah Toohil, R-Butler Township, made lowering the tax part of her campaign platform last year.

And a recent study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice shows that at least 14 Pennsylvania-based corporations paid nowhere near the 9.9 percent tax rate after deductions. One example: H.J. Heinz Co. had nearly $1.6 billion in profits from 2008 to 2010 and paid $13 million in taxes, a rate of 0.8 percent.

It has been estimated the commonwealth loses about $500 million annually using the current corporate net income tax accounting methodology.
Delaware Loophole addressed

Mundy says the Delaware Loophole – one of the most well-known tax dodges – works like this:

A corporation operating in Pennsylvania sets up a shell company in Delaware. The shell company controls the trademarks, patents or other investments, and charges the parent corporation a royalty for using the trademarked name or patent. That allows the corporation in Pennsylvania to treat the payment as a business expense, which it then deducts from its income in the Keystone State, reducing its tax burden here.

The loophole would be closed by adopting “combined reporting,” which would require corporations and their subsidiaries to jointly file one tax report and pay taxes according to the amount of business activity conducted in Pennsylvania. Twenty-three other states have enacted legislation to close the loophole, Mundy said.

According to the state Department of Revenue, more than 70 percent of multistate corporations doing business in Pennsylvania paid nothing in corporate net income taxes in 2007, while an additional 10 percent paid $1,000 or less – about as much income tax as a family earning $33,000, Mundy said.
Mundy: Reed bill limited

Mundy said she was pleased that two Republicans were among her bill’s co-sponsors, but she’s frustrated that the Finance Committee “seems to only be taking up tax cuts and tax credits. I don’t see any momentum for tackling anything comprehensive, especially since it might result in higher taxes for some corporations.”

Mundy said state Rep. Dave Reed, R-Indiana, in October circulated requests for co-sponsors for legislation that would close the Delaware Loophole, but while calling it a “first step toward fixing the system,” she advised her colleagues not to support it because of its limitations.

“Corporations use hundreds of techniques to shift income from state to state, not just by utilizing the Delaware Loophole. … If Pennsylvania chooses to only close the Delaware Loophole, companies will ask their accountants to figure out how to move to plans B through Z. … In the meantime, some corporations will continue to game the system, paying less than their share, and making taxpayers pay more,” Mundy said.

In addition, the Reed bills put the onus on the Department of Revenue rather than the corporations themselves, so the department would probably need to hire more staff and have its computer system updated sooner, placing more burdens on the state budget, Mundy said.

“All his bill does is enable the Department of Revenue to go after companies they can prove are illegally using the Delaware Loophole,” she said.
Combined reporting criticized

Reed said he will introduce his business tax reform plan later this month with bipartisan support.

“Included within that proposal will be an ‘add-back’ provision that will bring an end to companies utilizing holding companies in other states to avoid taxation in Pennsylvania; this is similar to the methodology used in 23 other states,” Reed said.

Reed said the major criticism to Mundy’s combined reporting approach has been “the impact to job creators that are not engaged in such practices. Thus, we went with a surgical approach geared towards closing such a loophole without adding additional burdens on those already playing by the rules.

“Rep. Mundy appears more interested in creating partisan warfare as opposed to actually closing the loophole and leveling out the tax structure. She had four years with a Democratic governor and her party in the majority, but no action taken to finally close this loophole,” Reed said.
Toohil weighs in

Asked for her input on the issue, Toohil said in an email that the state’s current corporate tax rate “does a disservice to Pennsylvania by chasing out and keeping out large companies and family sustaining jobs.”

The Delaware Loophole, she said, “is a horse of a different color. Whether or not a massive recession is the time to close the loophole, and with the effect of perhaps driving corporations out of Pennsylvania, is an item that is being discussed. I am seriously evaluating the pros and cons of its closure,” she said.

Toohil added that it was important to note that “under eight years of the Rendell administration, the Democratic leadership failed to make any progress with the closure of the loophole.”

Meanwhile, the state Department of Revenue “does have a series of enforcement options” to pursue corporations that try to use loopholes illegally to avoid taxes, said department spokeswoman Elizabeth Brassell.

“We’re looking to do all we can under existing law,” she said.





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