Part of Governor Tom Wolf’s new budget plan targets a contentious tax strategy known as the Delaware loophole.
The administration says Pennsylvania would save over $80 million by clamping down on businesses that funnel revenue to subsidiaries in places without corporate taxes.
But Republicans claim Wolf’s proposal is misleading.
The loophole has worked like this: businesses operating in Pennsylvania–and other states–can avoid paying some corporate taxes if they move assets to states like Delaware that have looser tax laws.
Such creative bookkeeping is considered legal, but deprives states of estimated billions in tax dollars.
A 2013 state law aimed to address the legal loophole by mandating businesses pay taxes on all profits from Pennsylvania operations. House GOP spokesman Steven Miskin said that should be the end of it.
“Act 52 of 2013 closed the so-called Delaware loophole as we know it,” he said. “But I admit that it is such a great talking point that has nothing to back it up, that some groups are still trying to raise money off of it.”
He characterized Wolf’s measure as a “tax grab.”
But even when it first passed, the 2013 law was criticized because it let businesses escape taxes on intangible assets, like trademarks. The Pennsylvania Budget and Policy Center at the time called it a “small step forward.”
Marc Stier, the think tank’s director, said the loophole isn’t closed by a long shot. He said combined reporting–the major provision of Wolf’s plan–is the best way to fix it.
That would tax corporations as a single entity, meaning that even if assets are sheltered in places like Delaware, they’d still be taxed if they made money in Pennsylvania.
Stier noted, over 20 states already have a combined reporting law for exactly this purpose.
JJ Abbott, spokesman for the governor, said the administration believes combined reporting would “level the playing-field for all corporations subject to corporate net income tax.”
The budget proposal also includes gradual decreases to the corporate net income tax rate starting in 2019. Revenue losses would be offset by gains from additional taxes received under combined reporting.