BACKGROUND

The corporate income tax, also known as the corporation excise tax, was adopted by Massachusetts in 1919. It served as a needed compliment to the personal income tax since “corporate citizens” use and profit from the state's public structures such as the justice system, transportation infrastructure, and public health systems.

Massachusetts has a 9.5 percent flat rate on most corporate income; certain kinds of corporations have different rates:

• Financial institutions: 10.5%
• Utilities: 6.5%
• Insurances companies: 2% of assets

The corporate income tax is usually calculated by a formula including sales, property and payroll.

Adjustments to the formula in 1994 and in 1996 benefited corporations and cost the state approximately $268 million in revenues in fiscal year 2007.

THE 2008 CORPORATE TAX REFORM BILL

January 2008 - Bill Filed. Governor Deval Patrick filed companion legislation with his budget proposal. The Corporate Tax Reform Bill seeks to close unintended loopholes including implementing “combined reporting,” which prevents multi-state corporations from avoiding Massachusetts taxes by shifting reports of profits to affiliates in other states, and conforming to federal rules to prevent companies from filing as partnerships in one state and corporations in another (aka “check-the-box conformity”). Two smaller provisions assure that internet retail agents pay the full hotel/motel tax and define the earned income tax credit as exclusive to Massachusetts residents.

The Corporate Tax Reform Bill would also lower the corporate tax rate by 13 percent over three years, settling at 8.3 percent in fiscal year 2012. Given all the changes, the Governor estimates that the bill will generate $297 million in new revenue. The Governor further estimates that at most 2,000 to 3,000 businesses will pay more in taxes where as 15,000 to 20,000 will pay less.

April 2008 - Passed by House. In March the Speaker of the House announced his support of closing corporate loopholes with some modifications. See the Mass Budget and Policy Center report on the differences between the Governor's proposal and the House proposal.

The Massachusetts House of Representatives passed (131-23) their compromise version of the Corporate Tax Reform Bill on April 11, 2008. The House bill will reduce the corporate excise tax rate to an eventual floor of 7.5 percent. To begin with, the rate will be reduced to 8.75 percent, and then any additional cuts are tied to economic indicators. The bill will boost corporate tax revenues, through the “combined reporting” and “check-the-box” reforms. However, an amendment offered by Rep. Bosley stripped the Department of Revenue of regulatory discretion around the “combined reporting” provision, and would allow corporations to mask overseas profits as well as give them an extra tax credit.

The overall tax bill also enacts a $1 per pack of cigarettes tax increase and will generate an estimated $392 million in additional revenue for fiscal year 2009.

This is the first major tax vote for the House since 2002.

May 2008 - Passed by Senate. The Senate passed their version of the tax bill focused primarily on closing corporate tax loopholes and cutting the corporate income tax rate. The Senate bill cuts the business corporation income tax rate to 8.0%; it includes a financial institutions rate cut, and it slightly modifies the "combined reporting" language from the House version of the bill. The changes will raise about $472m in FY09 and $310m when fully implemented. Both these estimates include revenue from the cigarette tax increase, which was also part of this bill.

June 2008 - Recommended by Conference Committee. According to the Massachusetts Budget and Policy Center, the Senate added amendments to the Corporate Loopholes Bill that increased the bottom line by $54.0 million, or $108.0 million less than the amount the House proposed spending and $27.4 million more than the Governor's proposal.

• The 80/20 loophole was a provision that had been contained in a House floor amendment that would have allowed companies with subsidiaries that do most of their business overseas to shift profits into those subsidiaries as a means of eliminating their state taxes on those profits. This provision could have cost the state over $100 million a year, but it was eliminated by the conference committee.
• The FAS 109 deduction was added by the House, creating a new tax deduction for companies “if book-tax differences for the fiscal period ending during the year of enactment of this section result in an increase to a net deferred tax liability or decrease to a net deferred tax asset for any taxpayer affected by this section.” The conference report keeps this deduction, but limits it and requires additional disclosures. It remains unclear how costly this provision will be.
• Apportionment for Companies with Financial and Non-Financial Subsidiaries sets rules for how to combine the income of companies that have both types of subsidiaries.
• Other Provisions. The Senate version of the legislation had included two other provisions. One, which was not included in the final bill, would have required Internet resellers of hotel rooms to charge the sales tax on the full retail cost of the room rather than the wholesale price they pay. This provision was not included in the final bill. The Senate also included a provision that clarifies that non-residents with income earned in Massachusetts can receive the state earned income tax credit only on income earned in the state. The final legislation includes this provision.

The legislation produced by a conference committee on June 30th will institute combined reporting and check the box tax reforms pushed by Gov. Deval Patrick, that will significantly reduce opportunities for corporate tax avoidance, improving the fairness and efficiency of the state tax system [See Massachusetts Budget and Policy Center for More Information].

July 3, 2008 -Corporate Tax Reform Bill Signed by Governor Deval Patrick. 

SAMPLE ARGUMENTS (2008 Bill)

SUPPORTING

• Closing corporate tax loopholes will raise about $500 million in additional revenue which can then be used to build up critical public structures like road and bridge repairs.
• Corporate income tax tends to be a very progressive tax since the people receiving corporate profits tend to cluster at the end of the income scale.
• When business taxes are examined over a full economic cycle we see that they have moved with the economy, but are now lower than at a similar point in the last cycle.
• “Corporate citizens” receive many benefits from public structures but pay a far smaller percent of their profit than do individual citizens, (i.e. 4.4 percent of GDP vs. 4.5 to 4.9 percent of GDP during the last economic expansion).
• Comparing FY07, a growth year, to FY02, a recession year, does not depict a fair picture because, of course, business incomes will turnaround and thus, so will their taxes.
• When all business taxes are considered collectively, business taxes in Massachusetts rank 40th in the nation, indicating that they are paying less than their fair share.
• The proposal would create more horizontal equity (i.e. fairness) in the tax system.

For more information see:

Coalition for Tax Fairness
Mass Teachers Association
The Massachusetts Government

OPPOSING

• Closing corporate tax loopholes would increase taxes on corporations and would undercut the creation of jobs and thus exacerbate the state's long-term fiscal problems.
• It is doubtful that these tax changes would produce the hundreds of millions of dollars claimed by the Patrick Administration.
• Corporate income taxes increased 156 percent from FY 2002 to FY 2007.
• Despite the disproportionate amount of attention on the corporate excise, it accounts for 15 percent of all the state and local taxes imposed directly on businesses in Massachusetts.

For more information see:

Massachusetts Taxpayer Foundation
Associated Industries of Massachusetts Foundation