Cross-posted at The Eisenthal Report
The Worcester Telegram & Gazette reports this morning that Massachusetts House Speaker Sal DiMasi (D – Boston) and Senate President Therese Murray (D – Plymouth) have agreed on an increase in Chapter 70 local aid for fiscal 2008 that will be $20 million higher than the $200 million increase called for by Governor Deval Patrick.
According to the T&G, DiMasi and Murray agreed to a joint resolution on the matter “to discourage attempts…to increase local school funding amounts with floor amendments that would deviate from the agreed-upon total figure.”
The House budget for fiscal 2008 is likely to be released this month. With $20 million more in local aid than the Governor’s budget, it will bear watching how the House proposes to balance the budget in the face of a nearly $1 billion budget gap. House Speaker DiMasi has declared his public opposition to the closing of corporate tax loopholes; it is estimated that if these tax law changes are enacted, the Commonwealth of Massachusetts would realize $250 to $300 million in new revenues next year. To substitute for this measure, the Speaker reportedly favors additional spending reductions and transfers from financial reserves.
The budget that Governor Patrick submitted is already a lean budget – it proposes only $150 million in spending for new programs. Budgetary reductions contemplated by Speaker DiMasi would either come from this spending or from already existing programs. Boosting local aid at the expense of other programs could be politically difficult for the Speaker and his members.
If the House proposes funding the additional local aid from reserve fund transfers, this also could become politically difficult – for Governor Patrick. He might be forced to make a choice between allowing a reserve fund transfer that he views as fiscally irresponsible and a line-item veto of funding in an area that he has declared a high priority.
It is possible that the revenue estimates upon which the FY08 budget will be built could increase as actual revenues come in over the next few months. If this does not happen, it becomes all the more important for Governor Patrick to try to win on the issue of closing corporate tax loopholes.
centralmassdad says
How does “only” $150M in new programs qualify as “lean”?
jkw says
You have to compare it to prior years and the whole budget. Also, it is only $25 per person in the state, which is not a whole lot. By comparison, MBTA passes have gone up by a lot more than $25/year. So has what most people pay for gas. Average property taxes have probably gone up more than that too.
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It is easy to forget how large the numbers are in government budgets. The reason it is easy for legislators to provide giveaways to their friends is in part that a few million dollars is barely noticed. According to the DOR website recent press releases, Massachusetts collects about one to two billion dollars a month in taxes. Which means that $150million is less than a week of tax revenue.
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If you’re truly concerned, the budget is online. Go look through it and find some waste. Call your legislators and complain about it. If you have time, set up a meeting at their office where you can go over every item in the budget that you don’t like. Write a diary here about all the wste you can find so that you can try to get other people to contact their legislators too. The government is only as accountable as people are willing to make it.
ryepower12 says
How he plans on balancing a budget, while increasing local Chapter 70 aid, all without closing unfair corporate tax loopwholes and facing a billion dollar budget gap is beyond me. He’s either the miracle maker or planning on some major cuts in areas like UMASS – cuts I’ll fight off vigorously.
peter-porcupine says
That most of the loopholes had already been debated 7 months ago under a bill Romney had filed, and were rejected then. That they would be about $250 million, but that over the last 4 years, about $400 million had already been closed by the Lege. That it was foolish to have an economic stimulus plan and then raise taxes for people who write 5 year plans to determine the siting of new business at the same time.
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It convinced me the House won’t do it.
johnk says
It was actually 80 million or so. From what I recall there are 3 out of the 7 proposed loopholes that were first proposed by Romney. Alan LeBovidge at the DOR is still there and he’s the one who first defined the targets. Shifting income to out-of-state subsidiaries and avoiding taxes here in MA was never proposed by Romney. I don’t think that was ever considered or debated by the legislature. This one by far is the largest estimate revenue at 136 million of the 250 million. `Check the box’ where a business can claim one status for Federal but a different one for the State was one of the loopholes that Romney initially purposed but he yanked it himself when the business community complained about the 400 million that the other proposals would incur. I’ll link to the article if I find it.
johnk says
It was a recent article from the Globe, the Romney proposals were a few years old, so it wasn’t 7 months ago. A few days later David posted the loopholes with the 250 figure, so the numbers are more accurate.
peter-porcupine says
If it’s exaggerated or inaccurate, that’s even more interesting as it indicates an even greater level of reisitence.
david-eisenthal says
I think it’s important to bang the drum on this issue. It’s important because 1) it’s fiscally responsible, 2) it’s fair, and 3) Governor Patrick need to win on a high profile issue so that he can build his “pol cred.”
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While these are, in effect, one-time revenues, the Commonwealth should not be leaving these funds “on the table,” especially when the alternative is using more financial reserves.
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As johnk points out, the largest single loophole is the one that allows businesses to check different boxes on their federal and state returns. Individuals aren’t allowed to do this. It is a matter of fairness to more evenly distribute the Commonwealth’s tax burden. As for Peter Porcupine’s concern about businesses not locating here, I don’t think that an adjustment of tax law of this scope should be a major factor in business lcoation decisions. Businesses that want to be here will still want to be here because of the affluent economy and educated workforce. I would also argue that any business that would not locate here for such reasons is not a good corporate citizen – we would not want them.
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The final issue is the Governor’s “pol cred.” He needs to take on Speaker DiMasi and win as a matter of power politics. The Governor’s effectiveness for at least the next 18 months depends, in my view, on his regaining the momentum that he had coming out of the November elections. One way of doing this is mobilizing his supporters to lobby their legislators on this issue.
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This is not the last comment I will have on the issue.
gary says
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The “check the box” tax increase that Patrick has proposed isn’t the big change. The biggest of the increases is combined reporting.
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Regarding the “check the box” tax increase, under current law individuals who form LLCs can choose corporate for Federal tax and partership treatment for Mass, so yeah, individuals are allowed to do it and probably the smallest of the small businesses are the ones who actively do it.
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The tax increase would mean that every small business owner–every lawyer, doctor, realtor, devloper–who operates through an LLC and who has previously elected differing FED/Mass treatment would suddenly have to pay the Mass Corp Excise tax.
heartlanddem says
…and they should not?
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I think if “Sal” were really concerned about the small business owner they would have developed a wider swath of exemptions on mandatory health insurance/penalities to business owners.
gary says
Whether they should or should not isn’t relevant. If they do, it’s a tax increase to small business. Don’t dress up this pig and call it a princess. It’s no tax loophole.
gary says
You decide, with your partner to open a shop, say HeartlandDem Deli. You pay 5.3% tax on the profits.
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Now you worry you’ll get sued personally if someone slips and falls, that you better form a LLC. You pay the $800 to record the LLC with the Sec of State, plus you have to file an annual report each year and pay $100 or so. You check the box for federal to have the entity taxed as a corporation and you file a partnership return for Mass. You pay 5.3% tax on the profits.
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I submit A & B enjoy the same state service. B doesn’t ‘get’ more government services simply because it’s now an LLC. Why then, should it pay more?
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But, never fear, Loophole Man swoops in. He fights evil Federal and State differences! That’s not fair! He changes the law and compels your Deli to pay the minimum $456 annual Corporate excise tax. That’s an extra 100 sandwiches, or else you must raise the price, or else you must take a paycut. No matter, now you pay 10% on the profits.
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Loophole? Or tax increase. You tell me.
stomv says
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The amount you pay in taxes as an individual citizen/company has nothing to do with the amount of services you get as an individual citizen/company. So, kindly get that idea out of your system. They’re taxes, not direct purchase of goods or services.
gary says
Then why is it fair?
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Why is it a loophole?
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What is the distinction between A (the non-LLC) and B (the LLC) in my example that compels “Governor” Loophole to insist that B, in fairness should pay taxes. Enlighten me.
joeltpatterson says
of being a legal entity, but doesn’t get the downside of it?
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If you can get the benefits of legal protection by forming an LLC, shouldn’t the corporate taxes be part of the cost of those benefits?
gary says
centralmassdad says
from slip-and-fall liability.
gary says
Let’s see if I get this argument. We should raise the tax on certain LLCs, because the tax the LLC will pay is the price to get insulation from liability:
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Distinquish then for me, why one LLC (#1) will pay corp tax under the new tax increase, while the other (#2) won’t:
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1: An LLC that’s a partnership for Federal and a partnership for Mass gets insulation from slip and fall liability and pays no corporate tax.
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2: An LLC that’s a Corporation for Federal but a partnership for Mass also gets insulation from slip and fall liability and does pay corporate tax.
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So if insulation from liability is the benefit from paying Corp tax what does the Federal treatment have to do with anything?
mr-lynne says
its insulation from all sorts of liability, including the liability of your partners. An auto insurance dealer forms an LLC with a mortgage insurance dealer. As I understand it, if it turns out that the mortgage guy is committing fraud liable for $10M, the auto insurance guy never pays a dime if it goes to cort. More to the point… lets say that the mortgage guy is only worth $2M,… its tough luck to the poor saps that did business with him because the auto guy won’t have to pay.
gary says
Ok, then the benefit of being an LLC is huge. Then we should subject all LLCs to a higher corporate tax rate. Right?
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Why just limit the tax to those LLCs who have elected to be treated as a Corporation for Federal purposes? That’s what the Patrick proposal would do.
mr-lynne says
I’m thinking of an LLP
johnk says
IMO the difference is a strategy used for “tax avoidance” that they want to address. There’s a whole industry out there that reviews the tax code and find ways to not pay taxes which was not the intent of the tax code. One example is shifting income to out-of-state subsidiaries, no income here I moved it to Oklahoma! Another being avoiding sales tax by having this out-of-state subsidiary (in paper only) buy the equipment then “leasing” it here in MA, wala, no sales tax! Closing these items are closing loopholes in the tax law. On the other hand increasing the state tax rate would be a tax increase.
mr-lynne says
is the IRS to get together with the SEC and stop this fraud where a company can report numbers to the government with the intention of avoiding tax that differ from numbers they report to stockholders with the intention strengthen sharesholder value.
raj says
…Given the fact that nobody here or even in Massachusetts is really interested in closing one of the biggest property tax loopholes in the state–that for colleges, universities, and establishments of religion, this “diddling around the edges” regarding this, that, and the other of business taxes is pretty much a waste of time. Make the colleges, universities, establishments of religion, and other “not-for-profits” pay their equitable share of property tax. If you don’t, then you have no particular issue regarding business taxation.
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You really don’t. And most of you apparently don’t even want to understand the issue.
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Going up just a bit, for Mr. Lynne, the sad fact that you have is that the IRS and the SEC have different financial reporting requirements. Neither of them makes any sense, but that’s why corps have two sets of books. Just to let you know, the European reporting requirements are even less stringent than either the IRS’s or the SEC’s, and that’s one reason why European companies are loathe to go onto the US financial markets. Hint: money is fungible; the companies don’t have to go onto the US financial markets to get money from US investors.
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I stopped trying to pay attention a number of decades ago, but, as far as I can tell
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(i) A corporation (this is in the USofA) is an entity that exists separate and apart from its shareholders. The shareholders are not liable for the liabilities of the corporation except to the extent of their investment*.
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*For the lawyers among us, unless the “corporate veil” can be lifted. Term of art. Likelihood of happening–slim and none.
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(ii) A partnership is an entity that exists, not seperate or apart from its members. The partners are personally liable for all of the liabilities of the partnership.
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(iii) A limited partnership is a mixture between a corporation and a partnership. The lead partner (which may be a corporation) is liable for all of the liabilities of the partnership, but the other partners are not. But, so the limited partnership headed by a corporation goes down the tubes? So what? The corporate owneres of the limited partner are insulated, as are the other partners. I’d use my German, but you know what BS means.
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(iv) An LLP (limited liability partnership) appears to be a “kinda/sorta” partnership but in which the members of the partnership are responsible for their own liabilities, but not for other members of the partnership. Something like a law firm. They would be responsible for the joint liabilities of the firm regarding the housing of the firm, but not for other issues.
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(v) An LLC (limited liability corporation) I guess that’s similar to an LLP. Actually, As I believe I’ve mentioned here, there is a similar entity here in Germany. A GmbH–a Gesellschaft mit beschankter Haftung. That form is usually used as a subsidiary of a joint-stock company or a limited partnership, but the interesting thing that I learned while working for a GmbH is that the GmbH could actually own the entity that supposedly owned it.