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Politics & Government

House Readies for Vote on Bill to Close Corporate Tax Loophole

A bill crafted to close a corporate tax loophole in Pennsylvania in a way that’s most palatable to businesses is teed up for consideration by the state House.

The so-called Delaware loophole has bedeviled legislators and governors for years. Its name comes from the practice of corporations that transfer money from commonwealth affiliates to a company in Delaware — a state with no corporate taxes.

There are different ways to go about closing the loophole, and therein lies much of the conflict over a bill that’s passed a committee vote.

The bill’s sponsor, Rep. Dave Reed (R-Indiana), said his measure is intended to focus on only those companies moving money across state lines for the express purpose of avoiding taxation.

“If they’re moving it for a valid business transaction, we’ve got no problem with that, that’s the normal state of business, but if you’re just trying to avoid taxes in Pennsylvania, we want to close that loophole,” he said.

Several Democrats oppose the plan, saying there’s a better way to keep corporations from dodging the tax man: require companies to file a single tax return for all of its affiliates so that it doesn’t matter if money is moved from one to another. It’s called combined reporting, and supporters say it’s the only approach that would resolve the state’s so-called Delaware loophole.

“If you’re going to close loopholes, do it,” said Sharon Ward, with the left-leaning Pennsylvania Budget and Policy Center. “And this bill does not. It essentially is another property tax increase.”

The business lobby has long opposed combined reporting. Gov. Tom Corbett campaigned against it in 2010.

Reed said he’s not taking that approach because past efforts to advance it have failed, while a previous version of this bill passed the House with bipartisan support last year.

His measure will be considered by the full chamber later this week. It was amended to include, among other things, a reduction of the state’s Corporate Net Income tax rate by three percentage points over 10 years, to 6.99 percent. That means the closing the Delaware loophole wouldn’t end up making any money for the commonwealth.

“What we’re going to do is use the revenue to even out our tax rates," Reed said.