Blue Mass Group

Reality-based commentary on politics.

Governor Patrick to cut corporate taxes(?)

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As reported by the Boston Globe

“We may well find we can reduce the overall corporate tax rate. That would be good news”, Patrick said. But he quickly added: “I want to defer to the commission.”

I know this is in poor fashion but I do recall someone (all right it was me) saying

How about a win/win. We cut the rate and tighten the loopholes. Then the only ones making less money are the lawyers

To which our resident fiscal conservative (Gary) said.

Because that would take leadership and would involve political risk.

Someone may have some words to eat…

The big question is if there is a closing of the tax loophole with a tax cut, what will be the end result? A tax cut, a raising of taxes or a wash. And perhaps more interestingly what say you?

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  1. FDR:  “It is not fair to ask of others, what you are willing to do yourself.”

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    D. Patrick: “I want to defer to the commission.”

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    Seriously. Contrast, leadership and political risk.

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    “Loopholes” was and is a weasel word gussied up to sell a tax increase whether talking about combined reporting, or the internet services tax, . 

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    Fortunately, the Legislature leadership had the good sense to knock him off the loophole horse.  Perhaps the committee’s recommendations will make sense.  The corporate tax statutes should be i) simplified ii) combined reporting adopted iii) rates reduced. All three. I expect that should be the commmittee’s recommendations.  If Patrick recognizes the value of such reform and endorse, as opposed to grudging acceptance, it, it will be the right decision. 

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    • I’ll take that bait, gary. You’ve been saying that for months, and yet I’d like you to tell me how any of the, uh, “structures” (loopholes to the rest of us) that Patrick intends to “modify” (close) are actually a. fair and justifiable, b. actually intended by the legislature to create a particular kind of economic activity, and c. that that economic activity actually “deserves” specific endorsement through the tax code.

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      I don’t see it; to me, they’re plainly “loopholes”, and it’s more weaselly to say they’re not. But I know you’re good — have at it.

      • Ok, let’s you and me start a business.  We’ll call it Opera Hats are Cool.com on the obvious idea that [opera hats are the next big thing. suddenstop.typepad.com/BioValkyrie2.jpg]

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        We each chip in a few million, start C&G New York, LLC and C&G Boston, LLC.

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        The Boston LLC bought a snazzy building overlooking the Harbor in Boston, and the NY, LLC rented a floor in NYC.  Fashion. Gotta be near Madison Avenue.

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        Things are going gangbusters, and pretty much everyone in New York is buying the pointy hats, mainly because we got permission to use the Yankee logo plus Yankee fans were sneaking beer into the stadium in the horns. 

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        The big seller came from, Orbiz, who promised they’d advertise nationally for us if we gave Orbiz customers a big discount.  You know, click through Orbiz, buy the hat for 20% less.

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        Boston started a little slower.  People figured a woman in a pointy hat was sexist, you know handmaiden for the guy Gods and all.

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        The first year, we make a few bucks.  Loss in Massachusetts.  Big gain in NY.

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        Then it all took off in Boston.  We toned down the hooters look then Al Gore realized that muscular women on horses didn’t generate much CO2 and the whole concept became a global warming logo.  Money, hand over fist.  Sell! Haliburton buys our companies and we’re fat and happy forever after.  End of story.

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        What tax should we (fairly) pay along the way?

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        1: Internet tax.  Well, one of Mr. Patrick’s proposal is that Orbitz should pay sales tax on the hats  because it’s “like” the purchase of the hats from us and a sale to the public. 

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        That’s not true, IMHO.  Orbitz advertised for us.  It didn’t buy and resell. We gave a discount to Orbitz customers in exchange for that advertising.  Maybe it’s a debateable point, but calling it a loophole obscures the debate.

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        2:  Combined reporting. Let’s see, year one the company is losing in Mass and winning in NY.  Why should have to combine Mass and NY operations to pay Mass income tax on income not earned in the state? 

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        Furthermore, what if NYC was the loser and Mass the winner?  On a  combined reporting basis we’d have earned very little and paid very little even though we were earning large income in the state.  Combined reporting is a two way street. 

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        Finally, what if Mass adopted combined reporting and the Governor from NH called us up and said “guys! come on up to NH.  No combined reporting here.”  If it saved us a few bucks, maybe we’d move out business to Portmouth. Combined reporting makes a lot of sense if all your neighbors do it.  Otherwise, I’m not so sure.

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        Bottom line:  combined reporting is complicated policy.  Calling it a loophole obscured the debate otherwise.

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        3:  We sell the LLCs, which own all the trademarks, the inventory, the company cars (you have a Prius; I have a Hummer), the buildings.  Governor Patrick calls up and says “thanks to my loophole closing, don’t forget to pay the stamp tax on that building you sold.” 

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        Wait a minute Governor!  I didn’t sell a building.  I sold a business that owned and owns a building.  Why should I pay stamp tax on a deed transfer that wasn’t?  Again, policy.  Not loophole.

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        • You created a scenario (a pretty entertaining one) that supported your assertion.  Would you deny that others could create scenarios (perhaps not as entertaining) to support just the opposite?

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          I would agree that not all of the items the Governor is calling a loophole is a loophole. But I have to believe there are lots of scenarios in which companies look to circumvent the tax code with some nifty accounting (what many would call a loophole).

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          In the end the point I was trying to make is that we should give the Governor credit for taking what I consider to be the right approach and what I believed you considered real leadership rife with political risk.

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          BTW – I thought you where OK with combined reporting in MA?

          • You created a scenario (a pretty entertaining one) that supported your assertion.  Would you deny that others could create scenarios (perhaps not as entertaining) to support just the opposite?

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            You could come up with situations where the outcome isn’t fair–where lack of combined reporting, the internet tax or the other so-called loopholes result in an unfair outcome.  But that’s really my point. 

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            That’s the debate that I feel Mr. Patrick stiffled by labeling the items as loopholes.  Combined reporting in particular is substantive policy.  It’s a major change that makes major sense, so long as it’s accompanied by some rate reduction and simplification.  Yet, you had websites and blogs parroting ‘close the loopholes’ when really only tax geeks knew what combined reporting was all about.

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            We never heard the policy arguments.  Fact is, that loophole closing ad campaign probably cost the Governor; it didn’t fool anyone.  We knew it meant ‘raise taxes’.

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            He should have said from the beginning that it’s time for meaningful corporate tax reform that’ll attract business to the state and cause all businesses to pay an equitable income tax.

        • You’re cherry-picking your scenario.

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          How would you like it if an insurance company entered the market and started competing with you, but didn’t have to pay ANY taxes, because, well, they’re an insurance company and they have a tax loophole? That would mean they could sell hats cheaper than you.

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          How would you like it if a competitor bought another snazzy building overlooking the harbor but didn’t have to pay real estate taxes on it because the seller transfered the building into a partnership and then sold the partnership to your competitor? That would mean they could then sell hats cheaper than you.

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          How would you like it if Hats ‘R’ Us entered the playing field and avoided paying ANY taxes because they were a multi-state business, and they simply shifted their expenses to Massachusetts and all their revenue to New Hampshire — which allowed them to sell hats cheaper than you?

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          A tax loophole is a loophole when only a certain number of people can take advantage of it — whether that be telecom companies, insurance companies, internet retailers, or multinational corporations.

          • How would you like it if an insurance company entered the market and started competing with you, but didn’t have to pay ANY taxes, because, well, they’re an insurance company and they have a tax loophole?

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            Because insurance companies only have a reduced tax rate on certain classes of income.  If they were to sell hats they’d pay the same tax as me. And, if they sold too many hats, they’d lose their insurance classification status entirely.

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            How would you like it if a competitor bought another snazzy building overlooking the harbor but didn’t have to pay real estate taxes on it because the seller transfered the building into a partnership and then sold the partnership to your competitor?

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            Well, if I was stupid enough to pay a tax that the law doesn’t require me to pay, then good for him.  I’d have stuctured the deal the same as him.

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            How would you like it if Hats ‘R’ Us entered the playing field and avoided paying ANY taxes because they were a multi-state business, and they simply shifted their expenses to Massachusetts and all their revenue to New Hampshire — which allowed them to sell hats cheaper than you?

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            The rules are more complicated than that.  If the market is in Mass, then the apportionament rules and profit allocation rules would result in profit following the sales.  A benefit from ‘combined reporting’ is pretty much nil if the market is Massachusetts.  The corporate tax avoidance happens when large companies have large out-of-state markets and sales.

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        • What if the cultural superiority of the Athens of America led to the huge spike in business coming from Massachusetts, but the building is owned by another Opera Hat LLC formed in a state with no or low corporate income taxes.

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          p>  Now Lowtax Opera Hat LLC can charge the Mass entity rent equal to gross profits net of rent.  The Mass entity has no income, because rent is deductible as a business expense and thus pays no income tax in Massachusetts.

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          I think the point on the combined reporting has been that the present system can be gamed in order to reduce or eliminate taxes paid in Massachusetts.

          • Non-combined reporting can be gamed, but the particular example you give doesn’t game the system.  Under your example, Lowtax Opera Hat LLC would have nexis in Mass by virtue of its ownership of the building, so Lowtax would owe corp excise tax on the rental income and/or the value of the building located in Mass.

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            I could come up with some scenarios where a clever corporation could restructure to minimize tax, and no question, combined reporting is harder to game.

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            But, the fairness of combined versus non-combined reporting was never debated by the Governor.  He cast it as a loophole not as tax reform.  He was wrong, and more importantly for the Governor, it was a mistake because it was pretty clear he was just going for a tax increase.

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