This page was last updated on May 10, 2004.

Closing corporate tax loopholes is step toward fairer system; State Reps. David Levdansky & Mike Veon; April 30, 2004.

Below is a detailed critique of the above “guest column.”  The reps wrote the piece in response to commentary by The Commonwealth Foundation.¹  In summary, the proposed legislation is simply another backdoor means to increase the effective rate of the Pennsylvania corporate net income tax.  Reps Levdansky & Veon try to cover it with fairness claims.

The weakness of their argument is demonstrated by the fact that these reps repeatedly contradict themselves in this guest column.  You are in trouble when you cannot keep your story straight, especially in the same opinion column.

“Recently we announced plans to introduce legislation to close corporate tax loopholes that are costing the state hundreds of millions of dollars in lost revenue every year.”

[RWC] In this piece, loophole is liberalspeak for a legal provision of the Pennsylvania corporate net income tax code.  Do these reps refer to tax free municipal bonds, exemptions for dependents and deductions for mortgage interest, charitable donations, et cetera in the federal tax code as loopholes?

Note how the representatives believe revenue belongs to the state first.  If that were not the case, how could they claim legal tax provisions “cost” the state tax dollars?

“To the contrary, our plan to close loopholes would benefit the vast majority of businesses and it would permit tax rates to be not only fairer, but lower.”

[RWC] Keep an eye on that “lower” tax rate claim when you read the entire press release.  It never materializes.  The closest we get is a follow-on debate.

“We are talking about closing loopholes that have no benefit to most Pennsylvania taxpayers, including our business community.  The loopholes enable a handful of big corporations to manipulate the tax law to avoid paying anywhere near their fair share of taxes, while other businesses that don’t have a staff of tax accountants and tax lawyers continue to pay more than their share.”

[RWC] Manipulate?  These businesses are using provisions of the tax code that were legislated by the General Assembly.  Why do these guys try to make it sound as if these businesses are doing something illegal?  Am I manipulating the law when I intentionally drive below the speed limit to avoid paying traffic fines?

On a side point, are not these companies fulfilling a social responsibility by providing jobs to “a staff of tax accountants and tax lawyers?”  I’m kidding, of course, but this is something liberals would claim to justify adding complexity to the tax code.

“Most tax professionals acknowledge that the current loopholes available in Pennsylvania cause a significant difference between the statutory Corporate Net Income tax rate of 9.9 percent and the ‘effective’ CNI tax rate for many of the largest corporations.”

[RWC] No kidding.  This is also true for the federal and state personal income taxes.  This is always true when you have deductions and exemptions.  In general, deductions and exemptions are the result of high tax rates.

“The several hundred companies that take advantage of loopholes have an effective CNI rate far lower that [sic] those that don’t use loopholes.”

[RWC] Just above, it was a “handful” of businesses that uses these provisions.  It became “many” and now it is “several hundred.”  Which is it, gentlemen?  Were you wrong above or here?  I guess flip-flopping isn’t restricted to Sen. Kerry.

“That’s just not fair to the majority of the business community that plays by the rules.”

[RWC] The companies that use the subject provisions are playing by the rules.  Otherwise, these companies would be charged with tax evasion, a crime.  The reps want to change the rules.

“Tax rates are but one factor in business location decisions and capital formation.  Many other factors come into play, including proximity to markets, transportation, access to raw materials, access to capital, work-force skills, availability of job training programs and the quality of public education.”

[RWC] I believe job training programs and the quality of public education in this context are overrated, but that is an argument for another time.

Two factors the representatives chose to omit were cost of labor and the labor environment.  Pennsylvania has a well deserved reputation for a somewhat less than business-friendly labor environment.

“If taxes were the primary motivating factor in business decisions, as the Commonwealth Foundation would have us believe, then why did Pennsylvania still rank near the bottom in job growth after cutting business taxes by $5 billion during the previous Republican administration?”

[RWC] The answer is simple.  Even with the tax cuts, Pennsylvania still ranks in the top three in two of the most onerous taxes as described below.  When taxes only go from ridiculously high to very high, that is not a big plus.  There is also the issue of tax stability.  Though Pennsylvania did reduce business tax rates a bit, it also showed businesses it would retreat on cuts at the drop of a hat.  Here are two examples.  When it became clear Pennsylvania would have a deficit, both the Schweiker and Rendell administrations at least temporarily rolled back the Capital Stock and Franchise (CSF) tax rate cut.  This proposal by reps Levdansky and Veon is another example.  Businesses look for both low taxes and tax predictability.  Pennsylvania has shown it cannot be trusted when it comes to tax cuts.

Mr. Veon likes to claim taxes are not a big priority for business.  On a Democrat Party infomercial during late 2002 or early 2003, Mr. Veon stated taxes weren’t a big concern for business, claiming taxes were not among the top four or five issues concerning business.  An economic survey commissioned by the Pennsylvania Chamber of Business and Industry contradicts Mr. Veon’s claim.²  The poll indicated healthcare costs (89 percent) were the #1 concern and business taxes (83 percent) were a very close #2 for businesses in general.  Taxes were #1 for mid-sized businesses.

“Simply getting large corporations to pay the going tax rate on their income, rather than moving that income to other states in order to shield it from taxes, would have provided the state with enough money to get through last year without raising taxes.”

[RWC] Liberals just do not get it.  Changing the rules to increase tax revenue is no different than raising tax rates, except that rule changes tend to be less visible to voters.

“Our critics continue to play on the myth that Pennsylvania is a state with high business taxes.”

[RWC] Myth?  The Pennsylvania CSF rate of 7.24 mills for 2003 was highest in the nation.  For tax year 2004, it will drop to 6.99 mills putting it in a virtual tie with West Virginia (7.0 mills) for highest in the nation.  Though the tax is scheduled to drop by one mill per year until it dies, the phase-out has already been stopped once.  The Pennsylvania corporate net income (CNI) tax rate is 9.99%, third highest in the nation.  Pennsylvania is one of a minority of states imposing both CNI and CSF taxes.  Pennsylvania and West Virginia are the only two states that rank in the top 10 for both taxes.

In two consecutive sentences, the reps contradict themselves.  In the first sentence, they claim businesses move income to other states “to shield it from taxes.”  Translation: other states have lower business taxes.  In the second sentence, they say it is a myth that Pennsylvania has high business taxes.  If it were a myth, why would businesses move income to other states “to shield it from taxes?”

“By closing the loopholes, we can get a better picture of the amount of revenue the state should receive from corporations that abuse the system.  We then can begin the debate of how to use that revenue to reduce taxes on all businesses and fund services and programs the public wants.”

[RWC] Once again these gentlemen charge with tax abuse, businesses using legal tax provisions.

Let me get this straight.  These reps say they do not know how much tax revenue the change in rules would generate.  Did they not say above these changes would have eliminated the need for the miscellaneous tax increases of last year?  Which is it?  Were you wrong above or here?  If the previous claim were true, why would not the proposal provide for rolling back the miscellaneous tax increases or cutting the CNI rate appropriately?

The bottom line is eliminating these provisions does not result in a tax rate decrease for anyone.  Instead, it would only begin the “debate.”  I can guess how that debate would go.

“Former President George Bush had it right 24 years ago: trickle-down economics really is voodoo economics.”

[RWC] Revisionist history from liberals.  In his 1980 primary campaign against Ronald Reagan, George Bush #1 had it wrong.  To refresh the memories of these representatives, Ronald Reagan’s “voodoo economics” -- tax cuts -- fueled the 1980s business boom.  Similar actions are also partially responsible for the current recovery from the Clinton recession that began in late 2000/early 2001.  It is not a coincidence that recoveries consistently follow meaningful tax cuts.  Representatives Levdansky & Veon apparently hold onto the disproved belief that we can tax ourselves to prosperity.

Rule changes with only follow-on debate of rate cuts is a very bad idea because reps Levdansky & Veon are merely trying to get a backdoor tax increase.  If these reps were smart, they would acknowledge that individuals like you and me ultimately pay all taxes and would propose dropping all state taxes collected by business.

1. Closing “Loopholes” to Tighten the “Noosehole”; Grant R. Gulibon; The Commonwealth Foundation; April 21, 2004.

2. PA Business Leaders Rank Lawsuit Abuse As A Top Concern; Pennsylvania Chamber of Business and Industry; September 30, 2003.

© 2004 Robert W. Cox, all rights reserved.