The Delaware loophole lives

HB2150 has been advertized as closing the infamous "Delaware Loophole" in exchange for lower corporate tax rates. Many people say it won't close the loophole while providing a big tax break to corporations.

How Loopholes Work

One common way corporations avoid taxes is by conducting transactions between their subsidiaries. Using an array of “tax planning” techniques, companies can shift profits from one subsidiary to another or into or out of a particular state – with no real economic purpose other than tax avoidance.

The best-known strategy is the infamous “Delaware loophole,” of which the Toys “R” Us Geoffrey Giraffe case is the most widely known example. Toys “R” Us set up a company[1] in Delaware to hold the trademark for the Geoffrey Giraffe logo. The holding company charges Toys “R” Us retail stores across the country a royalty to use the trademark. The retail stores deduct this payment to the holding company as a business expense, reducing their income in other states and, in turn, their taxes. This is legal, even though there is no need for a company to sell the use of a trademark to itself – and no reason to grant an expense deduction. Because royalty income is not taxed in Delaware, the Geoffrey holding company (owned by Toys “R” Us) gets to keep the money tax free.

Phyllis is Phuming

HARRISBURG, May 2 – State Rep. Phyllis Mundy voted against a $3.3 billion corporate-tax-cut bill that passed the state House today, noting that it would result in devastating budget cuts and fails to make big corporations pay their fair share of taxes in Pennsylvania.

"Giving large-multi-state companies a massive, multi-billion-dollar tax break and allowing them to continue to use accounting schemes to avoid paying their fair share of taxes is the definition of corporate welfare.”...

Beyond the bill’s failure to close corporate loopholes, it also provides multiple corporate tax cuts. Mundy said the House Democrats tried to offer amendments to the bill that would have eliminated property taxes for Pennsylvania homeowners but Republicans used a procedural maneuver to block those amendments from being considered.

The end result, Mundy said, is a bad bill for Pennsylvania taxpayers.

"This bill gives corporations new ways to avoid paying their fair share, while also giving them a massive tax cut," Mundy said. "And, worst of all, it would place an even greater tax burden on everyday hard-working citizens who will be left holding the bag."

According to the TL Mundy was joined by Eddie Day Pashinski in voting against the bill. Predictably Republicans Karen Boback and Tarah Toohil favored it. Mike Carroll, and Jerry Mullery  were among 23 Democrats who joined 106 Republicans to vote in favor of the bill.

The bill blows such a big hole in the state's finances that even Dept of Revenue Secretary Dan Mueser and Governor Tom Cabot have reservations. Hopefully it will die in the State Senate.