Fix business tax structure, not just rate
Pennsylvania’s corporate tax rate is higher than those of 42 of the other 43 states that tax corporate income. At 9.9%, it’s lower only than that of neighboring New Jersey’s 11.5%.
But there is another difference regarding Pennsylvania’s corporate net income tax, in that most corporations manage not to pay it.
The law technically exempts only nonprofits, homeowners’ associations, agricultural cooperatives, business trusts and membership organizations. But large corporations use accounting techniques to get around the tax, funneling income from their Pennsylvania businesses to “parent” companies registered in low-tax or no-tax states. Such techniques broadly are known as the Delaware loophole, for business tax haven Delaware.
Most states, including such business-friendly enclaves as Texas, have eliminated such dodges by changing their income-reporting standards. But Pennsylvania lawmakers stubbornly cling to the evasion techniques while lamenting the high tax rate.
The objective should be to reduce the rate without reducing needed government revenue by spreading the tax burden as broadly as possible, which would require changing the tax structure to eliminate the Delaware loophole.
Instead, the House has passed a bill to reduce the corporate tax rate by just over 10%, from 9.99% to 8.99%. It also provides that if the state government general fund has a surplus in coming years, the rate would drop by another 11.1%, from 8.99% to 7.9%, by 2025. According to the bill’s financial analysis, each percentage-point reduction would cost the state Treasury between $400 million and $450 million a year.
Democratic Gov. Tom Wolf also wants a corporate tax rate reduction, and regularly has included them in his proposed budgets. But he wisely has tied reductions to reforming the corporate net income tax structure.
In previous years, the administration has estimated that the government could reduce the corporate net income tax to 6.99%, a 30% decrease, by reforming the structure to eliminate the Delaware loophole and spread the tax burden without severely reducing government revenue.
The matter likely will be determined in impending budget negotiations, which should result in a compromise that reduces the corporate tax rate while reforming the tax structure.