How the Delaware Loophole Costs Pennsylvania Small Businesses and Working Families

Small business owners in Harrisburg are struggling to compete with multinational giants that use legal tax maneuvers to avoid paying into the state’s coffers.

While local shops pay their full share, large corporations utilize the “Delaware loophole” to shift profits away from Pennsylvania, leaving working families to shoulder the resulting budget gaps.

According to reporting from Capital & Main, this tax disparity creates an uneven playing field for entrepreneurs like Andrea Grove. Grove opened Elementary Coffee at Harrisburg’s Broad Street Market in 2014 when she was 26, and she manages her business without the specialized accountants that large corporations employ to navigate complex tax codes.

“We don’t have accountants that will tell us about loopholes and these ways to get around these things,” Grove said. She noted that small businesses face the expectation of matching the output of massive corporations but must do so with significantly fewer resources.

How the Delaware loophole works

The mechanism relies on a multistate corporation establishing a subsidiary—often a paper-only entity—in Delaware, a state that does not tax royalty income. The Pennsylvania-based operation then pays that subsidiary a royalty for the use of its own trademark, allowing the company to deduct that payment as an expense. Consequently, profits earned in cities like Harrisburg or York are logged in Delaware rather than Pennsylvania.

Most other states have addressed this by implementing “combined reporting,” a method that taxes a company and its subsidiaries as a single business entity. Pennsylvania remains one of 18 states that have not closed this gap. The Institute on Taxation and Economic Policy estimates that this loophole costs taxpayers in those remaining states a combined $2.85 billion in lost revenue every year.

Don Griswold, who spent nearly 40 years building a state tax minimization group at KPMG before becoming Warren Buffett’s executive tax counsel, described states like Pennsylvania as “voluntary victim states.” He noted that the strategies he once designed for corporations successfully pulled hundreds of millions of dollars out of state coffers.

“How many kids did without their only meal of the day at school because of stuff I was doing?” Griswold asked, referring to the impact of reduced state revenue on programs like school lunches.

The fiscal shift in the state is measurable. Data from the Keystone Research Center shows that the share of Pennsylvania’s general fund tax revenue coming from corporations fell from 30% in 1972 to 12% in the 2023-24 fiscal year. Nearly two-thirds of corporations operating within the state pay no corporate net income tax.

The impact on public services

As corporate tax contributions decline, the financial burden shifts toward sales, property, and income taxes. The Institute on Taxation and Economic Policy ranks Pennsylvania’s tax structure as the fourth most regressive in the country, meaning lower-income households pay a larger share of their earnings toward these taxes.

The human consequences of these revenue gaps are visible in social services and local infrastructure. In York, Jennifer Brillhart, who leads the York County Food Bank, reported that the number of people served monthly rose from approximately 30,000 two years ago to 40,000 today.

She noted that while the goal is to never turn anyone away, the quantity of food provided in each box has decreased due to sporadic federal shipments and rising costs.

Public education is also feeling the strain. In Hanover, the South Western School District tentatively approved a $3.4 million budget increase, which requires a nearly 5% tax hike. Despite this, the district has halted long-planned renovations for Park Hills Elementary, a school that has not seen major updates since 2001.

Erin Keefer, a parent of a third grader at the school, highlighted the deteriorating conditions, noting that the heating, air conditioning, and electrical systems are failing. “All of a sudden, we’ve turned into this,” Keefer said. “We’re out of money, and we’re deep in debt. And how did this happen?”

The legislative stalemate

Efforts to close the loophole have repeatedly stalled in the state legislature. In June 2025, Representative Elizabeth Fiedler, a Philadelphia Democrat, successfully pushed HB 1610—a combined reporting bill—through the state House with a 104 to 99 vote. However, the bill has been held in the Republican-controlled Senate Finance Committee since September 2025.

The debate over the bill highlights a deep ideological divide regarding economic competitiveness. Opponents of the measure argue that combined reporting constitutes double taxation and could drive businesses out of the state. State Senator Greg Rothman, a Republican from Cumberland County, told an ABC affiliate that the policy would make Pennsylvania less competitive.

Representative Aaron Bernstein, a Republican from Ellwood City, also voiced opposition, suggesting that the state’s current high tax structure is what causes businesses to leave, rather than a lack of corporate tax revenue. He argued that the state needs to make its tax structure more competitive rather than increasing the burden on businesses.

Felicity Williams, executive director of the Pennsylvania Policy Center, suggested the loophole survives due to a combination of a Senate majority opposed to revenue measures, a belief that lower corporate taxes drive growth, and the influence of corporate money in the political process. The center estimated that if Pennsylvania implemented worldwide combined reporting, it could raise $1.537 billion in annual corporate tax revenue.

For small business owners like Grove, the issue is one of fundamental fairness. She expressed a desire for consumers to be more aware of these corporate tax strategies, though she acknowledged the practical reality of the market. “At the end of the day, people are still gonna stop at Starbucks, because they have all the locations,” Grove said.