Why Pennsylvania Should Close Tax Loopholes


On Tax Day, I wanted to share my recent op-ed for PennLive.com on Governor Corbett’s tax cut plan and the need for real tax reform in Pennsylvania.

On Tax Day, I wanted to share my recent op-ed for PennLive.com on Governor Corbett’s tax cut plan and the need for real tax reform in Pennsylvania.

For public policymakers, as for doctors, a guiding principle should be “first, do no harm.”

Unfortunately, Harrisburg has not taken this principle to heart in recent years. The last two state budgets cut more than a billion dollars for public schools and universities. Infrastructure investments have been delayed, and county human services funding has been slashed. Classrooms are more crowded, unemployment is rising, and local taxes are higher.

There is more harm to come. Hidden deep within Gov. Tom Corbett’s latest budget plan are major income tax cuts for corporations beginning in 2015 that, when fully phased in, will cost hundreds of millions of dollars each year. Profitable corporations will pay less, hardworking families will pay more, and our schools and communities will deteriorate.

Pennsylvania can ill afford a new round of corporate tax cuts. What it does need is true tax reform that closes loopholes and improves accountability.

For too long, large multi-state companies like Wal-Mart and Home Depot have been free to use legal loopholes to shield their income from state taxes and shift the cost of public services to families and other businesses. Wal-Mart is notorious for its aggressive tax avoidance strategies. It has lowered its taxable income by paying rent to a subsidiary and hired the accounting firm Ernst and Young to prepare 37 pages of tax-dodging ideas in states across the nation.

Wal-Mart is not the only one. Many multi-state corporations are able to shift income earned in Pennsylvania to subsidiaries in tax-haven states, like Delaware. One modest building in downtown Wilmington is home to 6,500 such shell corporations.

Many states have taken steps to protect taxpayers and homegrown businesses. They have taken companies to court to end the most egregious practices, winning victories against Wal-Mart, TJ Maxx, Toys R US and other companies.

Most states have also taken legislative steps to close tax loopholes. Twenty-three states have adopted “combined reporting,” which requires companies to file a single tax return for all related businesses like they do with the federal government. Thirteen additional states require companies to add back to their state returns income that is sheltered in other states.

Pennsylvania is an outlier, looking the other way as companies funnel income earned here to tax-haven states.

Last year, under the leadership of state Rep. Dave Reed, R-Indiana, the Pennsylvania House adopted legislation that paired a cut to the state’s corporate income tax rate with a modest step toward closing loopholes. The bill, while not perfect, was an important bipartisan acknowledgement that tax loopholes are a problem in Pennsylvania.

Unlike Reed’s bill, the governor’s plan makes no effort to close loopholes. Instead it rewards businesses that hide income and avoid taxes with yet another tax break. It is entirely unfair for those Pennsylvania businesses that pay their taxes and will see little benefit from a new round of tax cuts for big corporations.

This approach costs all of us. When companies don’t pay, the rest of us pay more in the form of higher property taxes, underfunded schools, mounting college tuition and a weakened economy.

Policymakers should be focused on helping Pennsylvania’s economy grow, but state tax rates are just one factor in that equation. Access to markets, good transportation systems, quality public schools and colleges, and a skilled workforce are all vital to economic growth. Tax reductions that lead to cuts in these critical services can undermine the state’s economy.

Unfortunately, the governor’s budget, while promising big tax breaks to profitable corporations, restores only one of every $10 cut from public school classrooms in recent years.

States with combined reporting have been able to raise an additional 9 percent to 13 percent in tax revenue, according to Pennsylvania’s Independent Fiscal Office. That means Pennsylvania has lost between $900 million and $1.2 billion since 2008 by failing to enact combined reporting.

If we level the playing field for all Pennsylvania businesses, companies will thrive because of innovation and a strong marketplace instead of their ability to avoid taxes. We no longer will have to pick up the tab for big businesses that are adept at gaming the state’s tax system.

Before enacting new tax cuts, Pennsylvania should get its fiscal house in order, addressing transportation, education and growing pension costs. Then perhaps, with loopholes closed and real accountability in place, some of the new revenue could go to modest tax reduction.

Lawmakers could then rest assured that they have done no harm – in fact, they could take pride in knowing they have cured a major illness in our tax system.