Promising Revenue Growth Could Ease Budget Cuts But Big Corporate Tax Cuts Spell Trouble

Even Governor Has Concerns About House Bill to Cut Corporate Taxes by Nearly $1 Billion This week brought some good news on the state revenue front, but it also brought some long-term worries as the Pennsylvania House voted to approve major business tax cuts over the decade. If signed into law, this bill will weaken Pennsylvania's economy and result in a long-term erosion to the quality of our schools, colleges, and health care. First, the good news. Pennsylvania’s Independent Fiscal Office (IFO) in a report this week predicted stronger state revenues based on an improving economy. This would give the General Assembly as much as $800 million to restore cuts proposed by the Governor. This is clearly good news, but both the Corbett administration and legislative leaders are already dampening expectations about the scale of funding restorations. Click here to read more about that. Rally at the Capitol: Hundreds will rally at the State Capitol at 11 a.m. on May 7 to call on lawmakers to enact a budget that works for Pennsylvania families. Learn more. Now, the troubling news. The House gave the green light this week to a bill making nearly $1 billion worth of corporate tax cuts by the end of the decade. House Bill 2150 does not close the Delaware loophole that large multi-state companies use to avoid paying state taxes, but it will mean major cuts to education and human services down the road and a tax shift onto individual taxpayers. And it comes with no commitment from businesses to put Pennsylvanians back to work. Twenty-three Democrats joined most Republicans in support of House Bill 2150, while two Republicans joined 56 Democrats to vote against the bill. The overall vote was 129-58. The bill is so costly that even Governor Corbett's administration has voiced concerns about it. Revenue Secretary Dan Meuser told Capitolwire this week: "And frankly, in a period when revenues are sensitive and budget challenges are great, the timing is not right to enter into a new program in tax reform that can create uncertainty, the governor is very interested in a perhaps larger more comprehensive tax reform bill, possibly next year if the timing is right. Hopefully it is and we will have a stronger economy and revenues are more stable.” Most Pennsylvanians support closing corporate tax loopholes to level the playing field for all businesses and boost the state's economy. But lawmakers need to act cautiously and responsibly. House Bill 2150 takes the wrong approach. It would ensure budget shortfalls, major service cuts and higher local taxes for years to come.Learn more about House Bill 2150 here. Come to the State Capitol Monday. Add your voice to the growing chorus in Harrisburg urging lawmakers to restore cuts to schools, health services and help for people with disabilities and struggling families. Join advocates from across Pennsylvania at 11 a.m. Monday, May 7 for a rally in the Main Rotunda of the State Capitol to call on lawmakers and the Governor to enact a budget that works for Pennsylvania families and our economy. Learn more about this event.

The Pennsylvania Budget and Policy Center is a non-partisan policy research project that provides independent, credible analysis on state tax, budget and related policy matters, with attention to the impact of current or proposed policies on working families.

Commentary: Let's Take a Responsible Approach to Closing Corporate Tax Loopholes

By Sharon Ward | Published in the May 1 edition of The Philadelphia Inquirer

More Resources on HB 2150 The Pennsylvania House is scheduled to debate legislation today that would take a modest step toward closing tax loopholes while making business tax reductions that would cost nearly $1 billion by the end of the decade. Learn more. Fact Sheet: HB 2150 Takes One Step Forward, Two Steps Back Memo: PA House Bill Won't Close Tax Loopholes But Will Make Major New Business Tax Cut Table: How Would Proposed Tax Cuts Impact Funding for PA School Districts Policy Brief: Bill to Close Tax Loopholes Doesn’t Get the Job Done

For too long, big companies have benefited from Pennsylvania lawmakers’ refusal to close tax loopholes. They have been free to use aggressive avoidance schemes to shield their income from state taxes and shift the cost of public services to families and other businesses.

After close to a billion dollars in cuts to public schools and social services, state lawmakers from both parties are taking another look at this issue. This bipartisan recognition of the problem is welcome.

Unfortunately, one proposed cure may be worse than the disease. State Rep. Dave Reed (R., Indiana) has introduced legislation, expected to be considered today, that would take a modest step toward closing loopholes but also give businesses tax cuts that would cost nearly $1 billion by the end of the decade. Closing loopholes only to open up big budget deficits is not the way to go.

But lawmakers do need to address this issue responsibly. In the three years after the recession hit, 265 profitable Fortune 500 companies managed to avoid paying state taxes on at least half their profits, according to a report by the Institute on Taxation and Economic Policy. Sixty-eight companies on that list — including such Pennsylvania-based companies as Heinz and Comcast — paid no state income tax on profits in at least one of those years.

None of these companies is breaking the law — and that’s exactly the problem.

In Pennsylvania, corporations use legal loopholes to shift income earned here to subsidiaries in tax havens such as Delaware; one modest building in downtown Wilmington is home to 6,500 such shell corporations. These loopholes cost Pennsylvania about $500 million a year, and that leaves the rest of us bearing more of the burden in the form of higher property taxes, underfunded schools, mounting college tuition, and a weakened economy.

Rep. Reed recently noted, “The mere existence of the [Delaware] loophole creates an unfair and unbalanced business environment. A successful business is not based on who can avoid paying the most taxes; it’s based on hard work and a good business model.”

He was right about hard work and good business models. That’s why it’s important to invest in a well-trained workforce and the roads and bridges that make commerce efficient and profitable in the state. The revenue to be gained by closing corporate tax loopholes can help Pennsylvania do that.

The idea that any closed tax loopholes should be offset dollar-for-dollar by corporate-tax cuts is nothing new. The state’s Business Tax Reform Commission first proposed it in 2004. But the commission also recommended unitary combined reporting, a much stronger approach to closing loopholes than Reed offers, along with higher tax rates for partnerships and other businesses that pay Pennsylvania’s very low tax on personal income.

The Reed bill, by contrast, offers all the tax cuts with none of the heavy lifting. It would further reduce investment in good schools, roads and bridges, and public safety, all of which boost the economy.

While some argue that the state’s corporate tax is too high, 85 percent of the corporations operating in the state pay less than $1,000 a year in income taxes — less than is paid by the typical household earning $33,000 a year. A modest reduction in the corporate-tax rate may be achievable, but research shows that tax cuts don’t pay for themselves. And if they force big spending cuts, especially in education, public safety, and infrastructure, they can actually hurt economic growth.

If we level the playing field for all the state’s businesses, companies will thrive because of innovation and a strong marketplace instead of their ability to avoid taxes. And the rest of us will no longer have to pick up the tab for big businesses that are adept at gaming Pennsylvania’s tax system.

Sharon Ward is director of the Pennsylvania Budget and Policy Center.

Dollars to Delaware

Let's Close Corporate Tax Loopholes in PA and Level the Playing Field for All Businesses

Get PBPC's Analysis of the Reed-DePasquale Tax Loophole Bill Read the Policy Brief Read the Press Release

Most states with corporate income taxes have taken steps to close tax loopholes. The Patriot-News recentlyeditorialized that Pennsylvania should do the same in a piece aptly titled "Nix the free pass." 

Representatives Dave Reed (R-Indiana) and Eugene DePasquale (D-York) have proposed legislation aimed at closing loopholes used by multi-state corporations to shift income earned in Pennsylvania to low- and no-tax states, like Delaware. It is important that they have acknowledged that the Delaware Loophole promotes an unfair and unbalanced business climate.

However, as PBPC explains in a new policy brief, the Reed-DePasquale bill needs to be strengthened to truly close the tax loopholes that are robbing Pennsylvania schools, colleges, health care providers and other vital services of millions of dollars each year.

Learn More About the Budget

If you missed our Pennsylvania Budget Summit in February, you can now watch video of the main sessions at the web site of the Pennsylvania Cable Network (PCN). More resources from the Budget Summit are alsoavailable at our web site.

And if you live in the Philadelphia area, join us this Friday for the Southeastern Pennsylvania Budget Summit. Learn more about the state budget and what it means for people living in the Southeast. The Summit will be held from 9 a.m. to 11:30 a.m. on Friday, March 16 at the United Way of Southeastern Pennsylvania, 1709 Benjamin Franklin Parkway, Philadelphia. Learn more here and click here to let us know if you plan to be there.