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GOP rep backs Pa. tax-loophole ban: Update

It's a question of fairness, says Dave Reed, R-Indiana

    by Joseph N. DiStefano
    Published 
(Adds comment from Citizens for Tax Justice, bottom)  State Rep. Dave Reed, R-Indiana, who chairs the PA House Policy Committee, says he's joining Rep. Eugene Depasquale, D-York, to produce a bill that would "close the Delaware loophole" and force more companies with Pennsylvania operations to pay income taxes here.
Delaware doesn't tax franchise fees, intellectual property payments and other 'passive' income. As a result, thousands of companies with operations in higher-tax states (in the past including energy companies like Shell and Enron, and telecom companies like Comcast and News Corp.) set up Delaware subsidiaries to collect fees from their out-of-state subsidiaries, rendering them effectively state-income-tax-free.
New Jersey, Ohio and other states have changed their laws to make it tougher to claim a Delaware exemption. But Pennsylvania Republicans turned back efforts by former Gov. Ed Rendell and his Democratic allies to do the same.

Under Gov. Tom Corbett, who's pledged not to raise taxes, companies may have thought they were safe. But Reed sees this as a fairness issue, according to his aide Stephanie J. Hewitson: Why should small, local businesses have to pay state income taxes but big, out-of-state-based firms that make a lot more money here don't? 

So why not back the Democrats' approach? Hewitson says Democratic bills have relied on "combined reporting" requirements that would force thousands of businesses that never used the "Delaware loophole" to do "onerous" additional accounting.

Instead, the Reed-Depasquale "add-back" requirements would enable the state Revenue Department to collect from companies that attempted to use the Delaware loophole, without burdening other businesses.
Not clear if Reed's plan gets backing from other GOP leaders or Corbett. Reed and Depasquale plan to introduce the bill language Wednesday.

NEW: I ran this by Matt Gardner, boss of nonprofit Citizens for Tax Justice. He said the Reed-DePasquale proposal closes "one specific loophole reasonably well. It just doesn’t do a thing to eliminate the many other tax avoidance strategies that we know are out there." Massachusetts and New York tried similar "add-back" strategies but found "it just wasn't an effective way of stopping tax avoidance," so they ended up with combined reporting (the PA Democrats' proposal) which many multi-state companies are now well used to.

But legislation that just closes "specific loopholes" without a larger strategy "are like playing Whack-a-Mole," Gardner added. "Even if you’re successful in closing one, you’re doing nothing to stop the emergence of additional loopholes. Combined reporting ends the Whack-a-Mole game by taking away the incentive for companies to artificially shift income from one state to another." Though "add-back legislation is probably better than nothing."

    JN
    Joseph N. DiStefano