2012-03-01 / Local & State

GOP Eyes Pa. Tax Provisions After Blocking Dems

By Marc Levy

HARRISBURG, Pa. (AP) – After blocking similar efforts by Democrats in recent years, Republicans in Harrisburg now want to chip away at a couple of state tax provisions that benefit businesses.

Business advocacy groups are not necessarily supporting the ideas now just because Republicans are getting behind them, and it's not clear that GOP lawmakers will be able to agree with each other to get them passed, particularly during an election year when no one wants to alienate potential supporters.

A month-old bill backed by the leaders of the House Republican majority would attempt to close the socalled “Delaware loophole.” It would give the state Department of Revenue the power to stop firms – usually large, multistate companies – from using an accounting sleight of hand to move profits out of Pennsylvania to a lower-tax jurisdiction in order to avoid paying the state's 9.99 percent corporate net income tax.

To make it easier for business advocates to swallow, the bill would also take major steps long sought by the business community to lower business taxes, including gradually reducing the corporate net income tax rate to 6.99 percent in 2019.

At the same time, the Corbett administration wants to scale back part of an approximately $73 million incentive for retailers that collect the sales tax and send it to the state in a timely fashion.

Neither seems to be embracing the other just yet, and the turf gets tricky for Corbett, a Republican who campaigned on a vow not to increase taxes and who counts business owners and executives among his strongest supporters.

A spokesman for the House Republicans, Steve Miskin, said Friday that the group had not yet taken a position on the governor's proposal, which was included in the budget plan Corbett unveiled Feb. 7.

Under the proposal, retailers that get to keep 1 percent of the sales tax money they collect would now be allowed to keep no more than $250 per month, which would bring another $41 million to the state in the fiscal year that begins July 1.

During Tuesday's Senate Appropriations Committee hearing, Sen. Jim Ferlo, D-Allegheny, asked whether that change is a tax increase. Revenue Secretary Dan Meuser responded that it is a “modernization.”

Asked about the House bill to close the “Delaware loophole,” on Thursday, Corbett said he hadn't seen it, hadn't talked to House leaders about it and couldn't say whether he would support it.

The bill's chief Republican sponsor, Rep. David Reed of Indiana County, said he has spoken to the governor's office and the Department of Revenue's secretary about it, and they seem to be open to it.

“Depending on who you talk to, it depends on how open, but they certainly want to continue the conversation,” Reed said Friday.

Meuser fielded questions from members of the House and Senate Appropriations committees on Tuesday and didn't exactly endorse the bill. At one point he called it “a very smartly planned idea,” but at another point he suggested that calls to close the Delaware loophole may be long on politics and short on substance.

“We have to make sure that the numbers add up, we have to make sure that it will be successful, we have to make sure that we're doing no harm first, because the governor's just not into a short-term answer that sounds good,” Meuser said.

Meanwhile, he said his agency already has the power to stop “sham transactions,” such as a holding company set up in a low-tax state with no employees and little activity, existing as little more than an accounting entry to collect royalty payments for intellectual property from sister companies in higher-tax states.

“ It gets a little more murky when it's not quite so clear cut,” Meuser's top deputy, Dan Hassell, told the House Appropriations Committee members. “When there's more activity in that holding company. There may be attorneys there who are actively protecting those patents and copyrights and that sort of thing, and so I think that's where legislation may be helpful to clarify those situations.”

It's not exactly clear how often the loophole is used, and Revenue Department officials provided no examples of any “sham transactions” they may have stopped.

Business advocates also warn that identifying and pursuing sham transactions is more complicated than it might seem _ which might be why former Democratic Gov. Ed Rendell advocated for “combined reporting,” a method adopted by more than 20 states, including New York and Texas, to force companies to pay their fair share of taxes.

A Rendell-convened panel, called the Pennsylvania Business Tax Reform Commission, recommended in 2004 that the state adopt combined reporting over the kind of solution that Reed is proposing, but Republican opposition doomed it. And while business advocates dislike it as a heavy paperwork burden, some suggest it would be simpler for the state.

“The cost that you're incurring to administer and prosecute, I think, could be avoided if we made the law a little more predictable and a little more fair,” Sen. John Blake, D-Lackawanna, told Meuser.

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