On Tuesday, the Pennsylvania House Finance Committee approved two bills that create new loopholes in our already Swiss-cheese tax system, further shifting responsibility for funding critical services to the middle class.
House Bills 78 and 48 will cut taxes for businesses but provide no offsetting revenue to fill the funding gaps they create. We raised some of the issues these bills create with committee members, but the bill won committee approval nonetheless.
House Bill 78 eliminates the Corporate Loans Tax and, with it, about $15 million in state revenue each year. This is a tax on non-bank lending to businesses. Eliminating this tax could allow owners of corporations to more easily reduce their company's tax bill by shifting profits to the owners in the form of interest payments on "loans." The interest would still be taxable for the individual, but at the lower personal income tax rate rather than the corporate net income tax rate.
House Bill 48 would open an even bigger loophole. It would exempt the transfer of business assets between family members from the state's inheritance tax. The bill raises fairness and state constitutional questions, as estates with business assets would now pay lower rates than all other estates.
There is no public policy reason for a tax preference like this, which ultimately shifts more responsibility for funding key services onto other taxpayers. It will allow business owners, who tend to be wealthier, to pass on assets to family members tax free, while the estates of regular folks are taxed if a used car, house or other personal property is passed on to heirs. The more creative accountants get with what a "business asset" is, the more this bill will cost.
Based on comments from the sponsors of the bills, both are part of a larger package of "tax reform" that Governor Tom Corbett will announce as part of his budget address. If recent history is a guide, these "reforms" will likely shift more taxes from businesses to individuals — and from the wealthy to the middle class.
Real tax reform should eliminate loopholes — not create more of them.