Governor Deval Patrick's Budget Recommendation - House 2 Fiscal Year 2009

Governor's Budget Recommendation FY 2009

Corporate Tax Policy Initiatives


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Governor Patrick    FY09 House 2 Budget Recommendation:
    Issues in Brief

    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor

 

Overview

Governor Patrick has filed companion legislation with his budget proposal to close unintended corporate tax loopholes that allow avoidance of business tax laws passed by the Legislature. This bill also gradually reduces the business tax rate from 9.5 to 8.3 percent to improve Massachusetts business competitiveness.

Business Tax Reforms

The two main proposed reforms are:

  • "Combined reporting": This reform prevents multi-state businesses from shifting income away from corporations doing business in Massachusetts to affiliates in low-tax jurisdictions, thus reducing their taxes paid to Massachusetts. It requires affiliated corporations engaged in unitary business activities to combine their incomes and file as one entity.
  • "Check-the-box conformity": This prevents businesses from filing federal and other-state tax forms as corporations while claiming another status on their Massachusetts tax returns.
In addition, the Governor's bill prevents Internet retail agents from avoiding the hotel/motel tax on the full price of a room as charged to the consumer, and clarifies that the earned income tax credit is available only to Massachusetts residents.

Corporate tax rate reduction

The Governor also proposes reducing the Massachusetts corporate tax rate from 9.5 percent, nominally the fourth-highest in the nation, to 8.3 percent over the three years after this one. (By the standard of total business taxation, Massachusetts - currently 40th highest in the nation - will remain among the most economically competitive states.) These lower rates, eventually a 13 percent tax reduction, will especially help smaller and Massachusetts-based businesses, which the loopholes closed by this bill have generally not benefited. At most 2,000 to 3,000 businesses will pay more in taxes; 15,000 to 20,000 will pay less.

Massachusetts Business Profits vs. Massachusetts Business Tax Revenues

This chart shows the Massachusetts business profits vs. Massachusetts business tax revenues.

Better tax policy

These significant tax reforms serve several important public policies:

  • Tax fairness: All businesses will pay their fair share of the costs of government that benefit them and all of us, and larger and out-of-state businesses will pay at the same rate as smaller and Massachusetts-based businesses.
  • Modernization: Massachusetts will join the 21st century and the national tax-policy mainstream. 22 other states, including virtually all our competitors, have already adopted combined reporting, and nearly every other state follows the federal check-the-box rules. As the charts above show, the antiquated Massachusetts business tax structure has not kept up with vibrant corporate profits.
  • Competitiveness: The substantial rate reductions will help Massachusetts businesses, especially smaller and in-state ones, compete in the global economy.
  • Adequate revenue: Although some of the new revenue raised by these reforms is being returned to business taxpayers through lower rates, the remainder will help the Commonwealth pay for important investments and public services that benefit businesses and all citizens - like health care, job creation, affordable housing, education, and transportation. In fiscal year 2009, the Department of Revenue estimates that this proposal will raise $297 million in new revenue.

A public and transparent policy development process

The Governor's legislation implements the recommendations of a 15-member Study Commission on Corporate Taxation that has carefully considered these issues for eight months. Appointed by the Governor, the Speaker of the House of Representatives, and the President of the Senate, the Commission held numerous open meetings, conducted a public hearing at which 46 witnesses testified, formed six committees that heard from many national experts, and ultimately produced a 686-page final report (available on our website, www.mass.gov/eoaf). The Governor believes that his proposed legislation faithfully reflects the Commission's considered and balanced recommendations.


Prepared by the Executive Office for Administration and Finance • Rooms 373 & 272 • State House
For more information contact:
David.E.Sullivan@massmail.state.ma.us
www.mass.gov/budget/governor


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