Wolf Seeks to Cut Corporate Tax Rate in Half, Broaden Its Reach

Gov. Tom Wolf said Wednesday that he will urge lawmakers to cut business taxes and make the state more attractive to employers by reducing Pennsylvania's major corporate income tax rate by half, but broadening how it is applied.

Against the backdrop of gigantic, rusty smokestacks of the former Bethlehem steel mill, Wolf gave a Lehigh Valley business group a preview of two of the proposals he will present to lawmakers next week as part of his budget address.

The plan to reduce corporate taxes comes as Wolf's administration readies its approach to a multibillion-dollar deficit and decides how to make good on the Democratic governor's campaign promises to inject $1 billion into education aid.

Under the plan, the corporate net income tax rate would drop to 4.99 percent, down from the current 9.99 percent, taking the rate from one of the nation's highest corporate income rates to one of the lowest, Wolf said.

The reduction would occur in three steps over two years — to 5.99 percent in 2016, 5.49 percent in 2017 and 4.99 percent in 2018.

A companion proposal would institute a practice called combined reporting in an effort to further crack down on companies that shift profits earned in Pennsylvania to lower-tax jurisdictions through the so-called "Delaware loophole." That would effectively broaden the income subject to the corporate net income tax.

Both steps would require approval from the Republican-controlled Legislature, which has been cool in the past to efforts to institute combined reporting amid opposition by business groups.

"It's time for pragmatism," Wolf said. "We've had enough ideology out there."

A Wolf administration spokesman said corporate taxpayers would save money overall under the two proposals. Last fiscal year, the corporate net income tax brought in $2.5 billion, about 9 percent of the state's total tax collections of $28 billion.

Top Republican lawmakers said they had not seen details of Wolf's plan, but Senate Majority Leader Jake Corman, R-Centre, said he wants to see how Wolf plans to make up for the $1.25 billion project cost of the rate cut.

Meanwhile, Corman and House Majority Leader Dave Reed, R-Indiana, cautioned that combined reporting can be troublesome for many businesses that do not try to shift profits out of state.

"That would be part of the evaluation process," Reed said. "Is this only going to impact companies that are doing those sort of practices or would it impact companies in a negative way that are paying their fair share already? That's part of the devil in the details."

The new governor also said he will not stand in the way of the scheduled Jan. 1 expiration of the capital stock and franchise tax, which is levied on corporations' value or property. The tax brought in $320 million in the last fiscal year.

On Tuesday, Wolf is scheduled to present a joint session of the Legislature with a 2015-16 state budget plan — his first — for the fiscal year beginning July 1.

Wolf also said he is proposing $5 million in tax credits for employers that create good-paying jobs, including a "clawback" provision to allow the state to recover the money if the jobs do not materialize.

Combined reporting is a method of taxation that effectively treats a parent company and its subsidiaries as a single corporation for state tax purposes.

The state Revenue Department has described the loophole as an artificial payment — or a "sham transaction" — by one arm of a large, multistate company to another arm of the same company that is located in a lower-tax or no-tax state, like Delaware. The end result is to lower the amount of the company's profits that are taxable in Pennsylvania.

Supporters, including Democratic lawmakers, say the change would reap hundreds of millions of new tax dollars from transactions that currently escape taxation in Pennsylvania. However, business advocacy groups say it is heavy-handed, administratively complex and can lead to double taxation and lawsuits.

Some Republicans say a 2013 law effectively closed the loophole. It gave the Revenue Department the power to count what it viewed as a sham transaction toward a company's tax liability without undertaking a full audit of the company's books.