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Auditor General Says Business Owe Millions In Corporate Taxes

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In rolling audits of the Pennsylvania Department of Revenue, Auditor General Eugene DePasquale says they’ve found that Pennsylvania is owed more than 40 million in underpaid corporate taxes. At the same time, the state owes businesses over 5 million from over payments.

DePasquale says it’s not a new problem. The audits have been finding a 6-7% error rate for the last four years.  The latest review found more than 12 hundred returns with errors.

He’s calling on the department to step up its efforts to collect the underpayments as well as return the over-payments and forward the difference to the Treasury. He says the net amount of 35.4 million could be factored in to the ongoing budget debate

He says the 35.4 million dollars should be part of the state budget to offset some of the cuts made over the last year. He says it could be used for variety of needs from environmental to education and health programs.

DePasquale could not name the companies that had underpaid, but said two of them were responsible for nearly half of the money owed. He says we should be doing everything we can to collect that revenue to offset tough budget cuts.

He says there are working families all over the state paying their taxes,  who are probably asking why corporations did not pay what they fully owed.

The audit results were announced on Tax Day.

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Gov’s Tax Reform Plan under the Microscope

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The Corbett administration believes the price of doing business in Pennsylvania is too high. So they plan to finally eliminate the capital stock & franchise tax as of January, and want to gradually reduce the state’s corporate net income tax from 9.99% – 6.99% over the next 12-years. 

“Governor Corbett’s broad-based tax reform proposal sets the stage for robust economic growth by developing a competitive business tax structure, as well as improving the process of collecting taxes and simplifying the tax code,” Revenue Secretary Dan Meuser told the House Finance Committee on Thursday.

But minority chair Phyllis Mundy (D-Luzerne) told Meuser there’s one glaring omission: the plan does not close corporate tax loopholes, like the Delaware Loophole.  Mundy is the prime sponsor of legislation that would do that via combined reporting, but Meuser suggests it would do more harm than good. 

Mundy also points out that the corporate tax breaks proffered by the administration would result in an $800-million dollar annual loss to state tax revenues when fully implemented.  “And I’m not at all sure – I wish I could believe – that these tax cuts for large corporations would result in enough job creation to overcome that deficit,” she says.

Meuser, however, says the economic growth spurred by the governor’s tax plan will mean $1-billion dollars in new state tax revenue by 2030.  “That comes from personal income growth, that comes from employment and that comes from sales tax revenues that are derived from those who are now working that weren’t before.”   

The state has the 2nd highest corporate net income tax in the nation and is one of only a few states that tax both business income and assets, in that the capital stock & franchise tax is a levy against a business’s assets regardless of whether it made money or not. 

The Corbett Tax Plan would also raise the cap on net operating loss deductions, allow for start-up business deductions, repeal the corporate loans tax and eliminate what Meuser describes as “nuisance taxes.” 

But everything is subject to the approval of the General Assembly, and as members of the Finance Committee exited Thursday’s hearing they surely noticed the protesters in the capitol rotunda who rallied against the Corbett plan and argued that corporate tax breaks do not create jobs.

Democrats, Republicans Both Talking Delaware Loophole

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A group of House Democrats is displeased with the new Republican-led attempt to close the so-called Delaware Loophole, but the two sides appear to be getting closer in the process.  The Delaware Loophole essentially allows large, multi-state corporations to avoid paying Pennsylvania business taxes.    

Back in January, Republican Rep. Dave Reed (R-Indiana) introduced a bipartisan bill aimed at closing that loophole through the ‘expense add-back’ provision.  But Democratic Finance Chair Phyllis Mundy (D-Luzerne) calls it window dressing.  “The language is so broad and riddled with exceptions that it’s ineffective and meaningless in terms of closing the Delaware Loophole,” Mundy explained at a capitol news conference on Wednesday. 

Phyllis Mundy

State Rep. Phyllis Mundy (D-Luzerne)

Mundy still believes the best way to go about that is through a process called ‘combined reporting,’ but she recognizes the political will isn’t there, and now advocates what she calls a better version of the ‘expense add-back’ provision.  She contends the Reed bill would actually create a ‘loophole within a loophole’ by allowing companies to deduct expenses they deem to be for legitimate business purposes.  “Corporations would have little trouble finding a reason to claim a legitimate business purpose in order to avoid paying their fair share of taxes.” 

Rep. Reed sees the new developments as a positive step.  “I am just glad that Representative Mundy has finally come to the conclusion that there’s not support for combined reporting in Pennsylvania, and that an add-back provision is the better methodology of closing the Delaware Loophole, and that the revenue should be used for tax fairness across the board,” Reed tells Radio PA.   

Both lawmakers support plans that would use the newfound revenue to gradually lower the state’s corporate tax rate from 9.99% to 6.99% over the course of six years.

Reed says that unlike combined reporting, the add-back provision would target only the companies actually using the loophole.  He anticipates a House Finance Committee hearing to be scheduled on the topic later this month. 

Currently 35-states use either ‘combined reporting’ or ‘expense add-back’ as a way to promote business tax fairness.