- Associated Press - Monday, February 24, 2014

HARRISBURG, Pa. (AP) - Despite GOP-backed legislation last year designed to put the issue to rest, closing the so-called “Delaware Loophole” is a popular issue on the campaign trail for Democrats running for governor in Pennsylvania.

On Monday, Tom Wolf, a former state revenue secretary and a Democratic candidate for Pennsylvania governor, told a Pennsylvania Press Club luncheon that the Delaware Loophole is still used to shield corporate profits from state taxes.

“It’s still open, it’s still available, there are still companies using it and as governor … I would do everything in my power to make sure that the Delaware Loophole ends as an option for companies,” Wolf said.

Wolf, as secretary of the Department of Revenue in 2007 and 2008, likely would have had insight into how the loophole is supposedly used, especially since the department does not disclose which companies are caught using it.

Department of Revenue officials tend to describe 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.

Wolf and other Democrats say they would close the loophole by introducing a method of taxation called “combined reporting” that effectively treats a parent company and its subsidiaries as a single corporation for state tax purposes.

Wolf said use of the loophole is more controlled than it was before.

Still, Democratic candidates see it as a way to generate money for their pet programs. For instance, a spokesman for U.S. Rep. Allyson Schwartz’s campaign said that revenue from closing the loophole could replace $100 million that she wants to divert to an existing rebate program for seniors who pay property taxes or rent.

Seven Democrats, including Wolf and Schwartz, are running for the party nomination to challenge this year’s re-election bid by Gov. Tom Corbett, a Republican.

A spokeswoman for Corbett’s Department of Revenue would not say Monday whether officials there view the loophole as effectively closed by a bill that passed the Republican-controlled Legislature last summer.

“We don’t really discuss the Delaware Loophole because it means different things to different people,” spokeswoman Elizabeth Brassell said.

Rather, Brassell said that the provision gave the 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.

The provision, sponsored by Rep. Dave Reed, R-Indiana, takes effect in the 2015 tax year and legislative budget analysts project that it will bring tens of millions of additional dollars into the state treasury. Combined reporting could bring hundreds of millions of dollars in, proponents say.

The Pennsylvania Chamber of Business and Industry, which endorsed Corbett’s re-election, opposes combined reporting, saying it introduces a new level of complexity for companies and potentially taxes them on profits earned in other states.

Gene Barr, the organization’s president and CEO, also complained Monday that the department won new regulatory power over businesses, but that businesses received no relief from the state’s 9.99 percent corporate net income tax as a trade-off.

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