From the office of State Sen. Wayne Fontana: Tax loophole unfair to small businesses


As I write this, the House has just introduced the Governor’s budget proposal from his March budget address and the House Republicans have just announced their version of the 2011-2012 budget. There are not any details yet, but I am certain that we will be sorting through a great deal of information and making some difficult decisions in the next month or so.

One of the most difficult items to deal with this process is that approximately 85 percent of the budget is beyond our control — it includes contractual and debt obligations, has mandates from the federal government and contains required expenditures as well. That makes our jobs even more difficult as we try to address growing needs within only 15 percent of the budget.

Please don’t misunderstand me, we all acknowledge that we must live within our means, but I disagree with the Governor and House and Senate leadership about how we accomplish that. My caucus has proposed budget savings that could provide more in this year’s budget without any service cuts and without new taxes; we have identified smart investments in the programs and services that we believe are important to the voters; and, we have highlighted key restorations that we hope to make during this budget process.

The Delaware loophole continues to be one of the first policies that I believe we should be looking at in this discussion. The Senate Democrats have long been advocates of this effort — 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 percent 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 PA 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 PA company earns $100 million at its PA locations, but then pays the investment company in Delaware $100 million for the use of the trademarks, copyrights, patents, etc. Now, the PA 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 and claim that it allows a company to reduce taxable income.

They also believe that use of the loophole makes the business more competitive and makes it financially viable for it to stay in PA. 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? Don’t we want it to be financially viable for everyone to stay in PA?

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?

In order to improve our economy, and our Commonwealth, we must strike a balance between fiscal responsibility and a fair tax system. Eliminating the Delaware loophole is the first step in that challenge.

Senator Wayne D. Fontana
42nd Senatorial District

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