Rep. Dave Reed (R-Indiana) discusses why he co-sponsored a bill to close the Delaware Loophole at a press conference at the State Capitol.
State Representative Dave Reed (R-Indiana) is a prime sponsor of a bill to close a corporate tax loophole that he says stifles job growth and creates an unlevel business environment in Pennsylvania.
Reed, who serves on the Team Pennsylvania Foundation Board of Directors, and Rep. Eugene DePasquale (D-York) want to end the Delaware Loophole that allows multi-state corporations to legally reduce their Pennsylvania tax liability by transferring ownership of certain assets to an affiliated company in Delaware.
“Rep DePasquale and l believe any discussion about reforming business taxes should include a move to close this loophole on businesses that use this for the sole purpose of Pennsylvania tax avoidance,” Reed said in a telephone interview. “Creating a competitive environment and a level playing field for job creators is vital to our economic recovery, and this proposal accomplishes both goals.”
Estimating the loophole loses the commonwealth between $30 and $40 million annually, Reed said passage of the bi-partisan bill would enable the state to: gradually reduce the corporate net income tax during the next six years from 9.99 to 6.99 percent; implement a single sales apportionment factor; and phase out the cap on net operating losses over a nine-year period.
“Year after year, the state ranks among the worst in the nation for the cost of doing business, so it’s clear that comprehensive business tax reforms are needed,” said Reed. “Closing the Delaware Loophole will bring consistency to our tax structure and lower the tax burden, showing that Pennsylvania is a great place to do business.”
Rep. Reed said Pennsylvania’s corporate net income tax is the second highest in the nation and phasing out the net operating loss cap would encourage business investment and growth. The tax credit allows companies to use current and past losses to offset future costs.
“A number of private companies have told us that Pennsylvania would be more attractive if we made these moves – especially with the CNI tax rate,” Reed said. “Implementing a single sales factor removes the disincentive for businesses not to locate their facilities here.”
The loophole has garnered significant attention over the years and has been criticized as a flaw in Pennsylvania’s business tax structure.
“A successful business is not built on hiring high-priced tax attorneys and accountants to avoid paying taxes,” Reed said. “It’s about having a good business model, working long hours, and making sacrifices. Most Pennsylvania businesses do not use this tax avoidance mechanism, which is all the more reason to close the loophole to ensure fairness among all employers.”
If passed, the law would target very specific transactions among close business affiliates and only affect businesses that are taking advantage of the loophole for the sole purpose of tax avoidance in Pennsylvania.
“I can’t think of a better way to create a more positive and equitable business environment than by closing the loophole and lowering tax rates for all companies,” Reed added.
