In the coming days, the Pennsylvania Legislature will be hammering out a deal to balance the 2013-14 state budget. One piece of the package will be a budget-related tax plan that may include a provision designed to close corporate tax loopholes.
Specifically, lawmakers are discussing the creation of a so-called "addback" rule. Such rules require corporations to add back interest and intangible expenses (such as for copyrights and patents) paid to related companies — often affiliates in Delaware or Nevada where the income is not taxed.
The House has already passed a budget-related tax plan (HB 440) that included the addback rule; however, the plan left much to be desired when it comes to effectively closing the Delaware loophole. Still, it was a first step — which for Pennsylvania is saying something.
The tax bill is now before the Senate, and apparently changes are being made to the addback rule to make it a bit more effective. The latest word is that addback language based on Virginia's law, but weaker, will be replacing the language in HB 440. While a Virginia-lite version might be an upgrade from HB 440, it could easily be made stronger, as the Pennsylvania Budget and Policy Center explains in a new policy brief.
Legislators have an opportunity — and an obligation — do the right thing for Pennsylvanians and enact a strong addback law. A weak rule will do little to stop corporations from sheltering profits in other states to avoid Pennsylvania taxes, and the commonwealth will continue to be shortchanged.
The state has been grappling with how to deal with corporate tax loopholes for more than a decade, but little progress has been made — until now. In 2004, Governor Ed Rendell's business tax reform commission recommended adopting combined reporting, a more comprehensive approach to closing loopholes, in exchange for a number of tax changes long sought by the business community. Since then, it has largely been a one-way street. Businesses got the shift to single sales factor and increases in the net operating loss caps, along with significant cuts in the capital stock and franchise tax rate and increases in tax credit programs, while nothing has been done to close loopholes. The cost of business tax cuts has mounted to close to $3 billion annually. Pennsylvanians cannot afford to continue down this road.
Fewer state dollars have been available to pay for core services like public schools, health care, and infrastructure. This has resulted in property tax increases at the local level and needs to go unserved. As the saying goes, there is no such thing as a free lunch.
A recent poll found that a majority of Pennsylvanians want the state to restore more funding to public school classrooms. Closing loopholes effectively could help raise the money to restore those cuts.
After a decade of debate, the time is now for lawmakers to adopt a strong addback law. We have some tips for doing this at our website.