Governor's Tax Plan Fails to Close Loopholes

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The Corbett administration has proposed a plan to reduce the corporate net income tax (CNIT) rate by 30% and allow more generous loss write offs for Pennsylvania corporations. When fully implemented, these new tax cuts will drain more than $750 million each year from the budget. This plan comes on top of more than 10 years of business tax reductions that cost $3 billion in 2013-14, one-third of what the commonwealth will spend on pre-K-12 education.

The Governor’s tax plan has a limited revenue impact in the first few years, as the larger and more expensive rate cuts begin in 2018, leaving future governors and legislators with fewer resources to balance budgets. Small revenue enhancements from a weak loophole closure provision, penalties, the elimination of little-used tax credits, and other changes are not sufficient to reduce the plan’s total cost. If enacted, this plan will make it more difficult for the commonwealth to invest in schools, health care, and infrastructure — all critically important to Pennsylvania’s communities and economy.

The Corbett administration estimates that the package will increase employment by 18,000 jobs by 2025, which is 0.3% of current employment. In his testimony before the House Finance Committee, Revenue Secretary Dan Meuser acknowledged that the tax cut will not pay for itself through increased economic activity. By 2025, the plan loses $7 in revenue for every $1 it raises.

The provisions of the Governor’s plan were incorporated into House Bill 440[1], which was passed by the House on May 6, 2013. The provisions of the bill and its costs and revenues are detailed below.

Net Revenue Impact of Gov. Corbett's Tax Plan

Estimated Cost of Governor's Plan (Net Impact on General Fund in $ millions)

Summary of Provisions

CNIT Rate Reduction  

The Governor proposes cutting the CNIT rate from the current 9.99% to 6.99% between tax years 2015 and 2025, for a total rate reduction of 30%. This phase-down is similar to the process used to eliminate the capital stock and franchise tax (CSFT), which began in 1999 and will be completed in 2014 (unless the Legislature delays it). The CSFT change proved very expensive, costing more than $2 billion annually in the final few years.[3]

Net Operating Losses (NOL) 

Corporations are able to carry losses from one year into future years to reduce their taxable income. Under current law, a company may use NOLs to offset 20% of their current year tax bill, or $3 million, whichever is greater. The Corbett plan increases the limits to 25% or $4 million in tax year 2014, and 30% or $5 million in tax year 2015 and later. The expected cost of this change is $11 million in 2013-14, growing to $56 million by 2015-16.

This change has been characterized as a benefit for new and emerging companies, but a study by the Department of Revenue found that companies having net worth of $100 million or more receive the greatest benefit.[4]

Sales of Services 

In Tax Year 2013, the commonwealth completed the move to “single sales factor” apportionment, which establishes how tax liability is calculated for multi-state corporations. In prior years, taxes were based on shares of sales, payroll and property in Pennsylvania; beginning in 2013, companies pay taxes only on the share of sales in Pennsylvania. This change was a tax shift, increasing taxes on some companies but providing a significant tax benefit for Pennsylvania-based companies that sell most of their products out of state. The Governor’s plan would apply similar rules to sales of services. This means that sales of services are allocated where they are consumed rather than where they are performed. This “market-based sourcing” of services has been growing in popularity among states, although a recent Grant Thornton report on the concept concludes that it is unlikely to increase fairness for taxpayers or ease administration for taxing authorities.[5]

The Governor’s tax proposal locks in the Delaware loophole by treating income from intangibles (royalties, trademarks, patents) differently. The plan would allow intangible income to be sourced where the costs relating to the intangible are performed (for example, in Delaware for managing a trademark) rather than where they are consumed (Pennsylvania).[6] If the commonwealth is moving to market-based sourcing for services to make the sourcing of sales more consistent, intangibles should be treated the same way. 

“Addback” of Intangible and Interest Expenses

HB 440 added a new provision to the Governor’s plan. It takes a small step toward closing the “Delaware Loophole” by requiring companies to “addback” to their Pennsylvania taxable income certain expenses (royalty or interest) paid to related companies, most often in low- or no-tax states like Delaware or Nevada. It offers a broad exception for transactions “related to a valid business purpose,” which would allow companies to skirt the law by claiming a valid purpose even if the primary purpose is tax avoidance. Most similar laws in other states require taxpayers to provide clear and convincing evidence of the validity of expenses claimed, making it harder to avoid compliance.

The bill also grants a “valid business purpose” exemption for all transactions between related parties that use market prices. This means that even if a company’s intent is to reduce its Pennsylvania taxes, the Department of Revenue must allow the transaction as long as the price the company charges itself is a going market rate for the interest or intangible expense.

Corporate Loans Repeal 

This is a tax on loans made to corporations by entities other than banks. The repeal would be effective beginning in Tax Year 2014. This tax currently brings in approximately $14 million per year. The repeal of the corporate loans tax is accomplished through a separate piece of legislation; its cost is included here as it is part of the Governor’s package. 

Personal Income Tax Changes to Partnerships, Trusts and Other Business Entities
(Net impact on General Fund in $ millions)
2013-14 2014-15 2015-16 2018-19 2021-22 2025-26
$3 $12 $12 -$22 -$27 -$33

Improved Tax Compliance

Many businesses are not structured as corporations. In these companies, known as “pass-through” businesses, the owners or shareholders, not the business, pay tax. Some may be small businesses, but many are not. Individual owners of a pass-through business pay Pennsylvania’s low 3.07% personal income tax (PIT) rate rather than the corporate tax rate. [7] Common types of pass-through entities include S corporations, limited liability companies (LLCs), limited partnerships, and partnerships. The Governor’s plan would make changes to improve tax compliance, including updating filing requirements by these entities and allowing the Department of Revenue to assess the entity, rather than each individual owner or member, in cases where income is underreported. The enhanced compliance measures are estimated to increase PIT collections by approximately $4 million per year. As more business activity is shifted to pass-through entities, it is important that Pennsylvania tax compliance requirements keep pace.

Eliminating the Credit for Taxes Paid to Foreign Governments

Current PIT law allows individuals paying taxes to states and foreign countries to receive a credit against taxes owed in Pennsylvania. The plan limits the credit to only taxes paid to other states – not foreign countries. This change raises $11 million in 2014-15, with the gain growing modestly over time. 

Adopts IRS Rules Regarding Start-up Expenses

Under federal rules, business owners are permitted to deduct up to $5,000 in expenses related to starting a business from their taxable income. Pennsylvania currently does not permit this deduction. Under the Governor’s plan, whenever the federal government changes the amount of expenses allowed to be deducted, so would Pennsylvania. This change is expected to reduce collections by $4 million per year. This is one of the few properly targeted pieces in the proposal. It is directed to small businesses and is only available when a new business forms and investment is made. 

Adopts IRS Rules Regarding Like-kind Exchanges

When a business trades property for other property (rather than selling it), the federal government allows taxpayers to defer the gain or loss on the transaction until whenever the new property is ultimately sold. Under current Pennsylvania law, the gain on the trade would be taxable the year it occurs. The Governor’s plan adopts the federal policy beginning in 2016. This proposal is estimated to costs $32 million in its first year (2016-17) and is expected to grow modestly over time.

While popular with investors, the proposed tax treatment is problematic. A recent New York Times article[8] discussed some of the issues with like-kind exchanges, while a tax advice piece on Fox Business said “Like-kind exchanges are truly one of the best tax loopholes for the average investor. The problem is that you have to keep trading up on property values to avoid taxation.”[9]

Other Changes (Net impact on General Fund in $ millions)
2013-14 2014-15 2015-16 2018-19 2021-22 2025-26
$5 $12 $13 $14 $15 $17

Closing the 89/11 Loophole

The 89/11 loophole allows real estate developers to avoid state and local realty transfer taxes (2% in most places, but higher in Pittsburgh and Philadelphia) by selling the property in two parts. In the first transaction, 89% of a company’s stake in the property is sold and within three years, the remaining 11% of ownership is sold to the same buyer. The tax plan closes this loophole making realty transfer taxes apply to sales of 90% of the ownership of a property, even if done with two transactions. A fix for this loophole passed in 2012, but it was not effective. The new change is expected to generate an additional $12 million in 2014-15, growing over time.

Eliminating Little-used Tax Credits

The Governor’s tax plan proposes to eliminate the call center sales tax credit and the coal waste removal and ultraclean fuels tax credit. The call center tax credit has a cap of $30 million per year, but less than $0.5 million was claimed each year. The coal waste removal tax credit has been authorized since 2000 for $18 million per year, but no credits have been issued. 

The Governor’s plan also claims to be eliminating the organ and bone marrow donor tax credit, but that credit expired in 2010. In February 2013, the House of Representatives unanimously passed House Bill 46, which would reinstate the credit.

In total, abolishing these credits is estimated to increase tax collections by $0.5 million per year.


While the Governor’s tax plan has sensible parts – in particular the enhancement of pass-through entity tax enforcement and the closing of the 89/11 loophole – the plan in its entirety should be rejected due to its excessive cost. Granting profitable corporations a 30% tax cut on the heels of eliminating the capital stock and franchise tax (costing billions of dollars of lost revenue for the state) is unaffordable. Making such cuts without effectively closing corporate tax loopholes is unwise tax policy and will come at the expense of investments in schools, colleges, health care and infrastructure. 

In total, this plan will cut revenues by more than $750 million per year – without requiring the companies benefiting from the cut to create a single job in Pennsylvania. It will tie the hand of future governors and legislators by adding automatic rate cuts to the state’s tax law.


[1] House Bill 440, Regular Session 2013-2014,

[2] These are conservative estimates, assuming no growth in the corporate net income tax base after 2014-15. Growth in the corporate net income tax base would result in these estimates being understated.

[3] Cost as compared to the 2002 CSFT rate of 7.24 mills.

[4] Commonwealth of Pennsylvania, Governor’s Executive Budget, 2008-09, Pages D103 to D109,

[5] Giles Suton, et al., The nuances of market-based sourcing of service revenue: Not all markets look the same, Grant Thornton 2011,

[6] Intangible income arises from the sale or use of intangible assets like copyrights, patents, trademarks, or royalties.

[7] Corporate owners would pay the corporate net income tax.

[8] David Kocieniewski, “Major Companies Push the Limits of a Tax Break,” New York Times, January 6, 2013,

[9] George Saenz, “How to Capitalize on Like-Kind Exchange of Property,” Fox Business, September 13, 2012,