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Politics & Government

House Passes 'Delaware Loophole' Fix and Assorted Tax Cuts

A bill to close the so-called Delaware loophole while lowering other taxes on corporations has passed the state House by a vote of 129 to 65.

The measure aims to capture revenue from companies that have transferred money from commonwealth subsidiaries to corporations in Delaware – a state without corporate taxes.

House Democratic leaders criticized the proposal for using an approach they say wouldn’t actually close the loophole.

“So I am left to assume that you have no intention of truly closing corporate tax avoidance schemes and the Delaware loophole,” said Rep. Phyllis Mundy (D-Luzerne). “You only want to give the illusion that you have.”

The bill’s sponsor, Rep. Dave Reed (R-Indiana), fired back on the House floor that his Democratic colleagues aren’t acknowledging what he called a conservative estimate that the state would collect between $70 million and $90 million more a year due to the change.

“If we’re not closing the Delaware loophole, then I would ask the members where is that money coming from?” Reed said. “I don’t think folks are just showing up at our doorsteps dropping off bags of cash.”

Under the bill, companies could still move intangible assets to an out-of-state corporation for what the legislation dubs a legitimate business purpose.

What would trigger a note from state tax collectors would be some factor showing money is moved out of state for the sole purpose of avoiding Pennsylvania corporate taxes.

“It gives clear guidance as to how, what the factors are to shut down the sham transactions,” said Majority Leader Mike Turzai.

Reed pointed out that several Democrats ended up voting for his measure, which was identical to the language drafted with the help of then-representative and current Democratic Auditor General Eugene DePasquale.

This marks the second time in two legislative sessions that the House has passed a bill aiming to fix the Delaware loophole, albeit using an approach reviled by House Democratic leaders.

Unlike last year’s bill, the measure that passed Monday afternoon contains tax overhaul proposals put forth by the governor. The major one is a reduction to the corporate net income tax rate, shaving off three percentage points over 10 years, starting with the fiscal year beginning in July.

But some things remain the same as last year – like the bill’s uncertain fate. The Senate Republicans’ spokesman says his caucus is still studying the bill and hasn’t finished considering what tax changes should be part of the upcoming budget.