Governor Patrick Signs Law to Close Corporate Loopholes
Law Will Ensure Tax Fairness by Closing Corporate Tax Loopholes, Cut Business Taxes to Ensure Commonwealth's Global Competitiveness
BOSTON- Thursday, July 03, 2008 - Governor Deval Patrick today signed into law an Act Relative to Tax Fairness and Business Competitiveness - a corporate tax reform bill that will help Massachusetts businesses retain their competitive edge, while generating hundreds of millions of dollars in new revenue to sustain vital government services over the next few years.
"This law both eliminates unintended gaps in our corporate tax code that some large, mostly out-of-state companies have used to beat the system, and reduces the corporate tax rate, a real help for smaller companies," said Governor Patrick. "I want to thank my partners in the Legislature for their work in passing this important legislation."
"With this new law, we make the Massachusetts tax code simpler, fairer and more predictable - striking the right balance between ensuring that everyone pays their fair share while helping the overall business climate with a significant corporate tax rate cut in these difficult times," said House Speaker Salvatore F. DiMasi. "I commend Governor Patrick, the Senate and the members of the House for their hard work. This new law is better for all their diligence."
"This new law reduces tax rates for almost all businesses while generating significant revenue for the Commonwealth," Senate President Therese Murray said. "It brings fairness and predictability to our corporate tax structure and levels the playing field for businesses of all sizes to help them maintain their competitive edge."
The new law will help reduce corporate tax avoidance and improve the fairness and efficiency of the state tax system. At the same time, the legislation also cuts corporate income tax rates to help businesses stay competitive.
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.
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.
- Combined Reporting : The legislation requires corporations that are engaged in unitary business operations to file combined returns with their affiliates. This method replaces the "separate return" structure. Combined reporting significantly restricts the ability of groups of affiliated corporations to shift taxable income out of the Commonwealth to low-tax or no-tax jurisdictions.
- Conforming to Federal Law:Currently, Massachusetts has different rules from the federal government and most other states, which have adopted the federal "check the box" rules. The new law will bring Massachusetts in line with federal rules. Companies must now claim to be a corporation on both their federal and Massachusetts state tax returns.
The substantial rate reductions will help Massachusetts businesses, especially smaller and in-state ones, compete in the global economy. The new law includes corporate tax rate reductions starting in 2010 for business corporations and financial institutions. Changes in the law include:
- The current business corporation rate of 9.5% is reduced to 8.75% in 2010; 8.25% in 2011; and 8.0% in 2012 and later years.
- The current financial institution tax rate of 10.5% is reduced to 10.0% in 2010; 9.5% in 2011; and 9.0% in 2012 and later years.
- The rate for S corporations with more than $9 million in annual receipts is modified so that the corporate rate (for a business corporation or financial institution as applicable) for the year minus the personal income tax rate for the year equals the rate for the large S corporation.
- The rate for S corporations with between $6 and $9 million in annual receipts is modified to 2/3 of the rate applicable to larger S corporations.
Some of the new revenue generated by these reforms will be returned to business taxpayers through lower rates, and the remainder will help the Commonwealth pay for important investments and public services that benefit businesses and all citizens, such as health care, affordable housing, education, and transportation.
In fiscal year 2009, the Department of Revenue estimates that this proposal will raise new revenue over the next five fiscal years:
- FY 2009: $285 million
- FY 2010: $390 million
- FY 2011: $269 million
- FY 2012: $190 million
- FY 2013: $163 million
"Besides promoting tax fairness and helping our businesses stay competitive, this new law will help provide necessary revenue at a time of increasing fiscal difficulty," said Secretary of Administration and Finance Leslie Kirwan. "I also want to thank the members of the Corporate Tax Study Commission for all their hard work that made this result possible."
"This legislation is a great accomplishment for every citizen of the Commonwealth, establishing a fair and competitive process while bringing in almost $475 million in additional tax revenue," stated Representative John J. Binienda, House Chair of the Revenue Committee. "This could not have been done without a team effort by every member of the House and Senate. The additional revenue will provide much-needed funding for services affecting so many of our communities, including education, public safety, health care costs and other programs vital to our seniors and children."
"Passage of this bill modernizes our corporate tax code to reflect increasingly complex corporate tax planning schemes. In doing so, it brings more equity and fairness to our corporate tax laws," said Senator Cynthia Creem, Senate Chair of the Revenue Committee. "While this bill will generate significant revenue for the Commonwealth, it is important to note that an estimated 15,000 to 20,000 Massachusetts businesses will benefit from this bill through an overall excise rate reduction."