State senators aim for fairer corporate taxes, closure of ‘Delaware loophole’

Democratic state lawmakers are drafting legislation to institute a combined reporting requirement for the state’s corporations, requiring them to accurately and comprehensively disclose revenues earned in Pennsylvania.

At Wednesday’s public hearing held by the Democratic Policy Committee, state Senators Katie Muth and John Blake took aim at the so-called “Delaware loophole.” This accounting strategy, according to the senators, enables corporations to declare certain types of revenue in the state where it is incorporated, avoiding paying taxes on intangible assets in the state where it operates.

Senators convened the public hearing to determine the best way to structure corporate taxes with consolidated disclosure rules and cuts to the corporate net income tax, adding it’s important the legislation is drafted using reliable data.

“Pennsylvania is in desperate need of tax fairness,” Muth, D-Royersford, said. “It’s frustrating to see corporations sheltering profits through avenues like the Delaware loophole, which then leaves small businesses and working people with the majority of the state’s tax burden.”

Blake, D-Scranton, said the corporate share of the commonwealth’s tax revenue has been chopped in half since 1972, dropping from 30% to 15%.

“While I support efforts to lower and eliminate business taxes such as the corporate net income tax, we should not be allowing tax loopholes that enable huge corporations to skirt their share of the tax burden,” he said.

Among those who testified was Jared Walczak, director of state tax policy with the Tax Foundation, who said separate state disclosures allow companies to significantly reduce the amount paid in corporate taxes.

“Critics of combined reporting are right in that it increases compliance costs and does not always result in a more accurate apportionment of income,” Walczak said. “Proponents are also right, however, in observing that the current separate apportionment approach permits some companies to reduce or even eliminate their tax burdens in Pennsylvania despite engaging in producing economic activity here.”