Governor’s Proposed Budget

As I outlined last week, our caucus has identified several key restorations that we hope to make and have also identified budget savings that we believe will allow us to make smart investments in the programs and services that we believe are important to our residents. In the next few weeks, I hope to provide additional information to you on how we intend to realize these savings.

Although not part of the proposal that we outlined last week, the Senate Democrats have long been advocates of closing the Delaware loophole. It is part of the Tax Fairness component in the PA Works Plan. Pennsylvania has one of the highest corporate net income taxes in the nation, but 70% of our corporations do not even pay it because of the Delaware loophole. Imagine how competitive we could be if all corporations paid their fair share in the Commonwealth? Sources estimate that Pennsylvania loses $450 million a year because of this loophole.

The Delaware loophole works like this: A company in Pennsylvania transfers the ownership of its trademarks, copyrights, patents, etc. to an investment company in Delaware. The Pennsylvania company earns $100 million at its Pennsylvania locations, but then pays the investment company in Delaware $100 million for the use of the trademarks, copyrights, patents, etc. Now, the Pennsylvania company has no income—and, therefore, no tax liability.  And the Delaware company? An exemption in Delaware law provides that the company does not pay any state income tax in Delaware either.

The loophole forces the state to rely more on taxpayers and small business owners—all of whom are already struggling to recover from a recession. Supporters say that the loophole is a tool that allows the companies to avoid that high corporate net income tax rate. They state that it allows a company to reduce taxable income and makes it competitive and financially viable to stay in Pennsylvania.

My question to those supporters is isn’t that what we want all residents and small businesses to be able to do? Isn’t it in the best interest for all taxpayers in the Commonwealth to be competitive and to make it financially viable for them to stay in Pennsylvania? Sure, we would all like to avoid high tax rates—but the reality is that there is a cost to providing state services and programs, maintaining our roads and bridges, and protecting the health, safety and welfare of our residents.  Shouldn’t that cost be spread across all parties so that it is as fair as possible for taxpayers?

We know that we must live within our means, but we can accomplish budget savings to provide more in this year’s budget without any service cuts and without new taxes. As I have stated before, this will be our focus throughout this budget process. Shouldn’t the Delaware loophole be one of the first policies that we look at in this discussion?