HB 2150: One Step Forward, Two Steps Back

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Corporate tax cut will cost PA $650-$730 million by end of the decade

Closing corporate tax loopholes is a responsible way to prevent cuts to schools, health care and other investments that create jobs and build a stronger Pennsylvania economy. House Bill 2150, a corporate tax bill sponsored by State Rep. Dave Reed, does not achieve this goal. Instead, the bill is one small step forward paired with two giant steps backwards. 

The legislation’s supporters describe it as a revenue-neutral tax reform that cuts corporate taxes and closes the Delaware loophole to pay for it. In reality, it will cost the state hundreds of millions of dollars annually within a few years. The bill prevents some corporations from unfairly shifting profits from Pennsylvania to Delaware and other low- or no-tax states by enacting an “addback rule,” but this doesn’t come close to covering the amount the state will lose in revenue from tax cuts in the bill. The result will be less money for things that boost Pennsylvania’s economy, such as a strong education system, roads and bridges, and safe communities. Closing loopholes is a good idea, but this bill takes Pennsylvania in the wrong direction.

Over the past 10 years, state lawmakers have cut business taxes by $2.4 billion with the hope of creating jobs. Instead, these tax breaks have contributed to cuts to critical services for families trying to manage in the recession and to the loss of 14,000 jobs in public schools and colleges in 2011.

The Pennsylvania House of Representatives is scheduled to vote on the bill as soon as April 30. 

It’s Too Expensive

The bill implements new tax cuts for large, profitable corporations. It will reduce the corporate income tax rate by 30 percent over four years, allow companies unlimited write-offs of prior year operating losses in 10 years, and complete the state’s move to a single sales factor apportionment formula. When fully phased in, the tax cuts will cost $971 million annually.  Based on an optimistic estimate of the legislation’s cost and its additional revenue, the bill will drain $654 million[1] to $732 million[2] from state services by 2019-20.

Estimated Cost HB 2150 (in millions)
  2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Tax Cuts -$8 -$63 -$207 -$390 -$554 -$717 -$869 -$971
Revenue - Addback Rule[3] $50 $176 $205 $213 $219 $226 $233 $240
Net Revenue Gain or Loss
$43 $113 -$2 -$177 -$334 -$491 -$637 -$732

It Doesn’t Close the “Delaware Loophole“

The bill requires companies to add back expenses to their Pennsylvania income, including expenses paid to related companies in other states. But it offers a broad exception for transactions “related to a valid business purpose.”  This means a company can easily skirt the law by claiming a “valid business purpose.” Most similar laws in other states are written to provide clear guidance and make it hard to avoid compliance. 

An amendment in committee would close one longstanding loophole by capping the sales tax vendor discount for big companies.[4] This provision will likely be stripped from the bill prior to the final vote.

There Are Better Approaches  

  • Eliminate the broad exemption to the addback rule. Requiring all income from intangible expenses and interest to be included, with only very limited exceptions, would raise significantly more money for investment in Pennsylvania’s economy.
  • Require tax cuts to be voted on each year by the legislature. Tax cuts should be treated like other spending and be subject to annual votes rather than being renewed automatically. The statutory phase out of the capital stock and franchise tax is a good example of the difficulties with this approach. Four times between 2000 and 2011, the General Assembly found this automatic tax cut to be unaffordable and was forced to delay it legislatively. A better approach is for lawmakers to vote on tax cuts on an annual basis, just as they do with the budget.
  • Evaluate business tax cuts for impact, just like spending cuts. The cost of business tax cuts have tripled (now $2.4 billion annually) since 2002-03 without evidence that cuts have produced jobs or improved Pennsylvania’s economy. The benefit to the public remains unproven.

Learn More: Read more of our analysis of House Bill 2150 at http://pennbpc.org/tax-loopholes

Endnotes

[1] This figure reflects estimated revenue losses in 2018-19, including revenue from capping the sales tax vendor discount.

[2] This estimate for 2018-19 does not include revenue from capping the sales tax vendor discount.

[3] HB 2150, PN 3338 contains a provision to cap the sales tax vendor discount at $25 per month (which is slightly different than what was proposed in the Governor’s 2012-13 Executive Budget). While this provision raises additional revenue ($64 million in 2012-13), it is widely expected to be removed from HB 2150 before the House votes on its approval. The net revenue gain/loss listed here does not include the expected revenue from capping the vendor discount.

[4] The sales tax vendor discount allows retailers to keep 1 percent of the sales taxes that they collect on purchases. In 2007-08, $12 million of the vendor discount went to just 10 companies with sales exceeding $1 billion in Pennsylvania.