Cut in corporate tax rate, loophole fix could generate $330M
When it comes to calculating corporate net income, Pennsylvania is considered a “separate” reporting state — meaning companies based here that have subsidiaries file separate reports as if the subsidiaries were standalone businesses.
This allows Pennsylvania subsidiaries to “buy” goods and services from other subsidiaries in Delaware and other states with low or no corporate net income tax. Those purchases count as expenses against the Pennsylvania subsidiary’s revenues, which reduces its net income and, therefore, its corporate tax liability. The tax-avoidance scheme is known as the “Delaware loophole.”
Consequently, Pennsylvania’s 9.99 percent corporate net income tax, the second-highest rate in the country, falls mainly on small and medium-sized companies that don’t have out-of-state subsidiaries. Of the 113,400 businesses that were subject to the Pennsylvania tax in 2015, 76 percent paid no tax, according to the state Department of Revenue.
“Under combined reporting, corporations in a group will figure their income for the entire group, and each separate company owes tax on a share of the group income,” said Jeffrey Johnson, a department spokesman. “Transactions between members of the group are eliminated, making it harder to shelter corporate income from state taxation.”
The agency estimates that combined reporting would generate another $900 million in revenue at the current tax rate.
Gov. Tom Wolf has proposed adopting the system while cutting the rate to 7.99 percent by 2022. The agency estimates that would add about $330 million annually above current corporate net income tax collections.
Brian Bowling is a Tribune-Review staff writer.