The report, issued Wednesday by The Tax Foundation, a nonpartisan research group, ranks Pennsylvania 26th across the nation for a favorable business tax climate. Despite being below the median, Pennsylvania ranks better than five out of six of its neighbors.
Pennsylvania ranks better than West Virginia, Maryland, Ohio, New Jersey and New York for business tax climate. Delaware ranks 8th. Mr. Rendell said Delaware is a “known tax haven.”
The foundation calculates ranking by business taxes in the state, but Pennsylvania is the only state with two taxes calculated together to determine the rate. Small businesses in the state pay the flat 3.07 percent income tax everybody pays, but corporations pay a separate net income tax of 9.9 percent, the highest in the country…
Mr. Rendell disputed the effective corporate tax rate and said calculating for who pays the tax and how much is paid makes the actual corporate net tax rate 5. He said Pennsylvania’s true ranking might actually be in the top 15 states in the country, but he went on to advocate closing the Delaware loophole.
“I believe we should all pay our fair share of taxes,” said the governor. “It’s why I’ve worked so hard to remove the Delaware loophole that allows 74 percent of our corporations to pay no tax at all. That’s unfair to property tax payers, it’s unfair to individual income tax payers, it’s unfair to those businesses that do pay.”
The loophole allows companies to funnel revenue through Delaware to avoid Pennsylvania’s 9.9 tax. Combined reporting of revenue across states would close the loophole.
What is combined reporting?
Combined reporting requires multi-state corporations to report the income earned by both the parent corporation and all of its subsidiaries and to determine their income tax liabilities on that basis. As a result, combined reporting is the single most effective means of preventing corporations from avoiding taxation through accounting techniques designed to shift income from one state to another.
Basically, large corporations like Wal-Mart, Home Depot, and Toys R’ US (hence the Geoffrey Giraffe nickname), headquarter their parent companies in Delaware, and their subsidiaries – individual stores – pay the much 3.07% flat rate intended for small businesses.
The lack of combined reporting combined with a flat income tax gives Pennsylvania the dubious distinction of having one of the top 10 most regressive tax systems in the country:
In 2007, middle-class earners paid nearly double the share of their income in taxes than
the very wealthiest Pennsylvanians. For minimum-wage earners, the share of family
income spent on taxes was even larger…
Pennsylvania families earning less than $19,000 – the poorest fifth of Pennsylvania taxpayers – pay 11.3 percent of their income in Pennsylvania state and local taxes. Middle-income Pennsylvania taxpayers – those earning between $35,000 and $56,000 – pay 9.6 percent of their income in Pennsylvania state and local taxes.
The richest Pennsylvania taxpayers – with average incomes of $1,369,600 – pay only 5
percent of their income in Pennsylvania state and local taxes.
After accounting for federal deduction offsets, the discrepancy is even starker: the poorest fifth pay 11.2 percent of their income in state and local taxes, middle-income families pay 9.1 percent, and the richest Pennsylvanians pay 3.9 percent. Washington, Florida, South Dakota, Tennessee, Texas, Illinois, Arizona, Nevada, Pennsylvania, and Alabama were named as the 10 Most Regressive Tax States. Pennsylvania ranked ninth.
“No one would ever design an income tax with lower tax rates for the best-off taxpayers,” said Matthew Gardner, ITEP’s executive director and lead author of the study. “But that is exactly what Pennsylvania’s tax system overall does: it allows the very wealthiest individuals to contribute less of their income, on average, than middle- and lower-income families must pay.”
Here’s some tables if you want to get wonky.
It’s a really too bad that Dan Onorato missed the opportunity to take this up as a populist crusade during the campaign. If he would have run on a plan simiilar to the ballot initiatives hiking taxes on the rich that passed by huge margins in Oregon, he would have had a really potent issue on his hands.