Pa. House Democrats are trying to close the Delaware loophole by coupling the proposal with no tax on tips and overtime

Democrats in Harrisburg are coupling a proposal to close a corporate tax loophole with more popular tax policies in an effort to get bipartisan support during ongoing budget negotiations.

A bill sponsored by Rep. Elizabeth Fiedler, a South Philly Democrat, would close what is known as the “Delaware loophole” through what is called combined reporting. This would require multistate corporations to report all of their earnings to Pennsylvania, not just those they purport are from the state.

Currently, 73% of major corporations that are active in Pennsylvania do not pay any corporate taxes to the state, Fiedler argues, citing a figure from the Keystone Research Center’s nonpartisan Budget and Policy Center.

Large businesses avoid paying taxes in the state by shifting their Pennsylvania-based income to subsidiaries in other states, often Delaware. Gov. Josh Shapiro also proposed ending this loophole in his February budget proposal.

Democrats argue that eliminating the loophole would level the playing field for smaller businesses that do business only in Pennsylvania or lack the resources for high-powered lawyers, and that it would bring millions of dollars to the state’s coffers.

They also argue that it’s not new — 28 states led by both parties, as well as Washington, D.C., and New York City, already closed this loophole, according to the Center on Budget and Policy Priorities.

Rep. Steve Samuelson (D., Northampton), the House Finance Committee chair, argued that closing the loophole is a “basic issue of tax fairness.”

Fiedler said that the loophole is “ridiculous, puts small businesses at a disadvantage, and leaves our schools, libraries, and communities to struggle without adequate funding,” and that getting rid of it would be “a win for working people and for small, local businesses that pay their taxes.”

But Republican lawmakers argue that closing the Delaware loophole would discourage businesses from bringing jobs to the state.

In what could have been an effort to make the proposal more palatable across the aisle during budget negotiations, Democrats, who hold a majority in the state House but not the Senate, folded the measure into an omnibus tax bill with a handful of other tax proposals that have bipartisan support.

Some of those proposals, particularly alleviating taxes on tips and overtime and lowering the corporate tax rate, mirror some of President Donald Trump’s federal proposals.

State Rep. Jesse Topper (R., Bedford), the state House minority leader, said he would enthusiastically support those aspects of the bill but railed against closing the loophole and increasing taxes on businesses.

“It is the combined reporting part of this bill that makes it a poison pill,” Topper said. “And I don’t care if you put a spoonful of sugar in it, it’s still poisonous and will still make the economy sick in Pennsylvania.”

Rep. Valerie Gaydos, a Western Pennsylvania Republican, argued that combined reporting would encourage companies to stop doing business in Pennsylvania.

“Everything about us seems to be driving employers out of Pennsylvania, and House Bill 1610 is just the cherry on that sundae,” she said.

The omnibus bill passed the House 104-99 with support from Democrats and two Republicans — Reps. Craig Williams, who represents parts of Chester and Delaware Counties, and Thomas L. Mehaffie III, who represents part of Dauphin County.

The state’s divided legislature makes it particularly difficult to negotiate a budget, and it is unclear what impact Democrats’ attempt to make combined reporting more palatable will have on the agreed-upon tax code.

Here’s what else the bill would do:

Current state policy has been gradually lowering the corporate tax rate from 9.99% to 4.99%, ending in 2031. The rate is currently 7.99%.

This bill would speed up the timeline by two years to get the rate down to 4.99% by 2029, a measure also proposed by Shapiro in his budget proposal.

This measure can draw support from Republicans who want the state to be more competitive for businesses.

Alleviating the tax burden on tips and overtime has bipartisan support, in part because Trump has embraced the proposals. Trump rallied with a “no tax on tips” slogan during his presidential campaign, and Vice President Kamala Harris went on to propose the same measure on the campaign trail, an early sign of its national bipartisan appeal.

This bill would create a refundable tax credit for workers’ overtime taxes and end personal income tax on tips in the first place.

Both Republican and Democratic lawmakers in Harrisburg proposed bills for these measures, including one that was overwhelmingly sponsored by Democrats in collaboration with the head of the Pennsylvania Freedom Caucus.

The Working Pennsylvanians Tax Credit would provide a state tax credit for 30% of the federal earned income tax credit for the same year. The federal earned income tax credit is for moderate and low-income workers and parents, and has income caps that rise with the number of dependents.

State-level earned income tax credits already exist in 31 other states.

The credit has already passed in the House as its own measure, 185-18, with bipartisan support and all the no votes coming from Republicans. That bill was championed by the Pennsylvania United Way, which estimates that eligible households would receive an average credit of $780.

Another bipartisan measure would modify the rules for the state’s tax credit for income taxes residents pay in other states — which is meant to avoid double taxation.

This proposal would extend the credit so more categories of businesses could qualify, including resident partners — such as LLCs — and S corporation shareholders.

It is intended to “equalize that credit for all small businesses,” Samuelson said.