PA Needs to Get Serious about Closing Loopholes

Sharon Ward |

Check out my recent op-ed for on the opportunity — and obligation — the Pennsylvania Senate has to really close corporate tax loopholes with this budget.

Take a moment today to call your senator to say: Please support a bill that effectively closes corporate tax loopholes, rather than weak legislation that doesn’t get the job done. Additional revenue from closing loopholes should support schools and communities across Pennsylvania.

A decade ago, Pennsylvania’s Business Tax Reform Commission laid out a vision to bring greater fairness to the state’s tax structure and to make it more competitive in the 21st century. The plan included new business tax breaks but was balanced with measures to close tax loopholes that companies use to avoid paying Pennsylvania taxes. New revenue from closing those loopholes would pay for tax reductions without impacting other services, such as universities and public schools, that are also vital to the state’s economic success.

Since then, many of the business tax breaks have become law, but policymakers have taken no action to close tax loopholes. The cost of business tax cuts has mounted to close to $3 billion annually and is one big reason why the state is now facing an education funding crisis.

As the clock ticks toward a new state budget, lawmakers and Gov. Tom Corbett have turned their attention once again to closing loopholes. This is welcome news. If done right, it will help balance the scales after a decade of significant business tax cuts – recovering hundreds of millions of dollars that can be invested in neighborhood schools and health services.

Unfortunately, lawmakers are under heavy pressure from the business community to water the plan down, and that could mean Pennsylvania ends up with a law that protects loopholes, rather than closing them.

Earlier this year the state House, led by Rep. Dave Reed (R-Indiana), approved legislation to enact a so-called addback law in tandem with another large business tax cut. An addback law would require companies to add back to Pennsylvania income expenses paid to a sister company in Delaware or Nevada – for use of trademarks and patents, for example.

Since royalty income is not taxed in these states, Pennsylvania companies get to avoid a tax bill. While these related companies might have a few employees and some secondary role, like managing the trademarks, their primary function in many cases is simply to shelter income from tax.

The devil is always in the details, and the House bill offers a broad exception that would make it easy for companies to continue using their Delaware companies to avoid taxes. The House bill leaves the door wide open.

The state Senate, with support from the Corbett administration, is considering taking a step toward closing loopholes. But with each passing day the step gets smaller and smaller – and with some proposals providing new tax breaks, the cost grows more and more.

Pennsylvania is already in a lonely position. Most states with corporate income taxes have already made it clear that this type of tax avoidance is not to be tolerated. Since 2000, six states have adopted combined reporting, a more comprehensive approach to closing loopholes bringing the total to 23, while 18 states have adopted addback laws.

So there is no shortage of states for Pennsylvania to look to as role models. Since a national model statute was debuted in 2006, Indiana, Kentucky and Tennessee, among others, have adopted relatively strong addback laws. A recent analysis by Pennsylvania’s Independent Fiscal Office finds states that have closed loopholes have done a better job broadening their tax base – which keeps tax rates down for the rest of us – than those, like Pennsylvania, that have not.

Businesses have enjoyed a climate for more than 10 years where they have enjoyed significant tax breaks while nothing was done to close loopholes. Pennsylvania simply can’t afford that any more.

Many Republicans in Congress and the General Assembly agree that what is needed is revenue neutral tax reform, but to date we have had all tax break and no reform. You can’t have it both ways.

Senators are looking at Virginia’s addback law as a model, which is a step in the right direction.

Companies would operate transparently, listing deductions for expenses paid to related companies and providing convincing evidence that those deductions were not primarily undertaken to avoid taxes. Companies operate under these rules in other states, so the new process would not be a burden.

The state Senate has a real opportunity and an obligation to end the tax avoidance practices that have been so costly and are simply not tolerated in most states. Now is the time to revive the vision of greater tax fairness and competitiveness offered by the Business Tax Reform Commission a decade ago.

Every year, Pennsylvania loses hundreds of millions of dollars to tax avoidance – on top of the billions in business tax cuts enacted over the past decade. By clear margins, Pennsylvanians want to see additional state dollars spent to restore cuts to education and to improve the quality of life of all residents.

Lawmakers now have a choice: enact new tax cuts that will cost more or close the loopholes and invest in a better Pennsylvania.