Tuesday, June 05, 2007

Lame Excuses for Not Cutting the Corporate Net Income Tax - Part 1

It's pretty clear what the state needs to do in order to boost the lackluster job growth in the Pittsburgh Region and the rest of the state -- cut the Corporate Net Income (CNI) tax rate, which is currently the second highest in the nation and the highest flat CNI tax rate in the country.

So why doesn't the state do it?

Unfortunately, there is a long list of excuses, all of them lame.

Excuse #1: "We shouldn't cut the tax unless we also close tax loopholes."

Governor Rendell claims that he would support cutting the CNI tax to 7.9% if only the legislature would enact the tax reforms needed to "ensure that all businesses pay this tax." He says that "less than 25 percent of all Pennsylvania corporations pay the Corporate Net Income tax" and then claims that "In many cases these companies do not pay because they rely on tax shelters in Delaware and offshore island havens to decrease reportable net income for Pennsylvania tax purposes." (See the Governor's Letter to the Editor in the July 17, 2006 Post-Gazette (scroll down to the bottom of this link) explaining why the current state budget didn't cut the CNI tax despite a $700 million surplus.)

For years, state officials have been using this statistic that "75% of corporations don't pay taxes" to justify their claim that Pennsylvania has too many tax loopholes.

What they fail to explain is that the reason most corporations don't pay taxes is that most corporations have no income or profits at all (e.g., they may have no sales or employees). In fact, IRS statistics indicate that approximately half of the corporations in the country have no income.

In other words, most of the corporations that the Governor claims aren't paying their fair share of taxes would pay no tax regardless of how many or few loopholes there are.

The percentage of corporations paying taxes varies widely across the states, but the percentage which pay taxes in Pennsylvania is actually higher than in some states which supposedly have fewer tax loopholes. Although some companies may be using tax loopholes to avoid taxes, it is hardly the massive problem that the Governor's statistics would (mis)lead you to believe, and certainly not a justification for holding the CNI tax rate hostage at 9.99%.

The Governor's solution to tax loopholes is something called "mandatory combined reporting." Under this system, multi-state companies would be required to combine the income from all of their subsidiaries, including subsidiaries that have no operations in Pennsylvania, and then apply Pennsylvania's tax rate to the total.

Most of Pennsylvania's neighboring states do not have such a system (New York just instituted it, and West Virginia enacted it effective in 2009; Delaware, Maryland, New Jersey, and Ohio do not have combined reporting.) Corporate site selection consultants have indicated that establishing a mandatory combined reporting system would make Pennsylvania even more uncompetitive for business locations and expansions, even if the tax rate were reduced. Moreover, the Pennsylania Department of Revenue's own calculations show that under mandatory combined reporting, even if the corporate net income tax rate were reduced significantly, manufacturing firms would pay significantly more corporate taxes than they do today, making Pennsylvania even less attractive for manufacturing jobs than it is now.

In other words, the "cure" the Governor is proposing would be far worse than the alleged disease.

That's just one of the excuses used for not cutting the CNI tax rate -- there are more. They'll be exposed and debunked in future posts.


Blogger phineas said...

Misinformative piece. It states that none of PA's neighbors have combined reporting. NY introduced it months ago. Combined reporting helps in-state companies who currently must compete against firms that can use out-of-state subsidiaries to avoid paying Pennsylvania taxes. And combined reporting, like the current tax system, only taxes in-state business activity.

8:44 AM  

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