Tax Justice Digest stories about Massachusetts
About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth. Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation. It is now used in 20 states. Should the House bill be made law,
Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald’s. The amendment would constrain the Commonwealth’s ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance. Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of “at least $100 million to $200 million” -- or about half of the corporate tax revenue the bill might otherwise be expected to generate! Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent.
Fortunately, as the
Conservative commentators frequently depict
Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report,
There is far less agreement, however, about what to do with the nearly $500 million in additional revenue that combined reporting and other important tax reforms would ultimately yield. Governor Patrick would use a portion of that revenue to reduce
The Massachusetts Budget and
Forty-five other states already have these rules in place; instituting them in Massachusetts would generate an additional $100 million in FY 2008. The commission also expressed its support for combined reporting - a still more comprehensive reform that New York and West Virginia approved this year and that twenty states now employ - but will study implementation and design issues further in the coming months. Of note, the commission also found that the absence of such safeguards as effective "check the box" rules and combined reporting has allowed Massachusetts corporate income tax to fall from 11.5 percent of corporate profits in 1989 to 5.5 percent last year.
The commission also points out that "Insisting on greater shared responsibility for our Commonwealth's future, principally by asking a fairer share from larger, multi-state businesses, will not harm competitiveness and economic growth … influential economists cited to the Commission have concluded that, while taxes are one factor that businesses consider in deciding where to locate or expand, the predominance of other factors usually renders business taxation a much less significant consideration."
Indeed, the commission is heavy with members who hardly seem predisposed to support efforts to put an end to corporate tax avoidance. Upon being named to the commission, one member yawned, "Of all the priorities that the state faces, I would not put this near the top … The impetus for the commission really is a response to the governor's proposal rather than a crying need in itself." Another organization represented on the panel, the Associated Industries of Massachusetts (AIM), has boasted to its members that it has successfully "fought … efforts to establish combined reporting" - the central element of the Governor's tax reform proposals.
As expected, Massachusetts Governor Deval Patrick this week joined the ranks of chief executives calling for the use of combined reporting of state corporate income taxes to combat tax avoidance by large and profitable companies. Like the Governors of New York, Pennsylvania, and Iowa, Governor Patrick, in his FY2008 budget plan, recommended adopting this approach to corporate taxation, which would require corporations operating in multiple states to report all of their income — including that attributable to subsidiaries. This would negate any tax benefit derived from accounting schemes designed to shift profits out-of-state. A fact sheet from the Massachusetts Budget and Policy Center explains how combined reporting works and why it's needed in the Bay State. While Martin O'Malley has not yet added his name to this growing gubernatorial roster, Maryland legislators this week considered a bill to institute combined reporting in their state. ITEP Executive Director Matt Gardner was among those who testified on the measure.
State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.
