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.
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.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.
Competitiveness
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.
Adequate revenue
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.”
If I had time I’d do a diary about this law. It’s a real accomplishment.
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p>Not, perhaps, in the inside-baseball, Sal-v.-Deval scorecard thing so many obsess about. (However, the law is a big improvement from DiMassi’s original proposal and I credit the Governor with some of that.) But a big step forward for the Commonwealth.
is the incentives from the bottom up to more rapidly transition to clean energy. It is understandable that we might have to pay a premium to direct our electric energy source be clean and renewable, but if that commitment was accompanied by the carrot in a contract with lower out-year rates more people may participate. And if more people participate now, there would be more resources with which to develop clean energy production infrastructure.
And perhaps real governance happens one step at a time.
…but he does appear to have hit it! Great news, well done Governor Patrick!
“Tax Code Simplification”- he hates the term “loophole”. In any event, it promises to make accountants a little busier- at least for the time being.
thankfully (I’m assuming) the Bosley amendment didn’t make it through. I do think the tax rate was low enough as is, but this it’s obviously a net plus when it’s bringing in over $150 million and we finally have a scenario where big business will find it much harder to get all the breaks, while we make small businesses pay full price.
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p>This can’t be the end for finding new revenue and it can’t be the end for finding cost savings, but it’s a very good start.
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p>In the meantime we, as a progressive movement, should do the work that our State Government probably isn’t willing to do… and try to change gears to a graduated income tax over the long haul.
It’s going to take years to convince Massachusetts voters that this is in the state’s best interest, including probably 80-90% (or more) of its citizens.
And good riddance. Not sure who was responsible, but kudos to whoever it was.
and particularly their Revenue Committee chair Senator Cynthia Stone Creem from Newton who led the Senate in the conference on the corporate tax bill. I guess she really held the line on Bosley’s amendment. Creem was a member of the Corporate Tax Reform Commission that DiMasi/Patrick named over a year ago and was a consistent voice for real reform and a steady hand working with A an F Secretary Kirwan in shaping a balanced package. Senate President Murray was also really important to all this of course.
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Ryepower12
David
lanugo
Perhaps Ryepower12, David, or lanugo could explain why, as a matter of tax policy, a corporation incorporated in DE with 85% of its property, payroll, and sales outside the US should be included in a MA unitary group while at the same time a corporation incorporated outside the US with 85% of its property, payroll, and sales outside the US should not be included in a MA unitary group. I’m not sure if any of you had any sort of understanding of what the Bosley amendment actually did but I know that the MBPC called this provision a “new loophole” so it must be bad. However, Rep. Bosley lays out his argument for his amendment below. He wants the MA tax system to treat corporations according to their substance, rather than their form. If we’re going to exempt a foreign corp from inclusion in the MA unitary group, then why not exempt a DE corp when the substance of the corp is exactly the same? Why is his amendment so objectionable?
We have a job to do this fall on that ballot initiative, don’t we?
step one in the process.
I don’t see any loopholes closed, but it does change a lot of MA tax policy. It gets rid of the property tax exemption for the utility poles. It requires an entity that is treated as a partnership federally to be treated the same for MA tax purposes. There are also a lot of references to Chapter 62, which is the personal income tax. I wasn’t aware of any personal income tax changes that were part of this bill, but they seem to deal mostly with business trusts where the income flows through to individuals. The difference in treatment of foreign and domestic corporations is also dealt with in several places in the bill. At first glance I’m not sure what the actual specific changes are to business trusts or to foreign-domestic corps.
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p>The combined reporting portion of the final bill still has a waters’ edge election for an 80-20 group. I think that was the Bosley amendment that some people here were angry with, but then again no one could actually explain the amendment that made them so angry, so I’m not sure. David says that its gone, but an 80-20 waters’ edge election is definitely part of the final bill as passed.
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p>The legislation also seems to take a Finnigan apportionment approach, including entities protected by PL 86-372 when calculating the numerator of the sales factor. That approach is certainly the more aggressive approach. It was recently upheld in a New York case, so the danger that a MA court would find it unconstitutional is lessened. However, CA has backed away from Finnigan and the MTC declined to use Finnigan in its model statute so there clearly is some hesitation out there that it could be unconstitutional. The legislation recognizes this possibility with this:
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p>There are also changes to the Film Credit that I can’t figure out at first glance.
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p>Wow, this bill just keeps going (kind of like this post). The bill establishes a study team to look into allowing municipalities an option to increase meals and hotel occupancy taxes. And it creates another study group to look into MA joining the Streamlined Sales Tax Agreement. I don’t know how far off MA is from being compliant with the Streamlined Sales Tax Agreement, but thats another interesting nugget in this bill that I had not previously heard about.
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p>There is yet another study group created to study even more possible changes to the MA corporate tax system.
I guess the Gov. is considering getting rid of the single sales factor altogether. That would be another interesting update, but would be very premature considering that NCCUSL is considering updating the UDIPTA uniform law on apportionment factors. I don’t see any point in changing back to 3 weighted factors when NCCUSL is likely going to change the weights shortly thereafter in the uniform law.
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p>Overall this bill makes a lot of changes to the MA tax system, most of them good in my estimation. Kudos to all for getting this done.
MBPC says it was removed.
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So there is a worldwide unitary group election that can be made by the taxpayer, but its not the default position. Section (3)(ii) above indicates that, under the default position, only companies that average 20% or more of their apportionment factors in the US are included in the unitary group. Thats a standard 80-20 waters’ edge election that I think every other combined reporting system has in place.
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p>I’m not exactly sure what the Bosley amendment was in the first place. There was an angry post here talking about a “new loophole” and a link to a Wall Street Journal report indicating that Walmart had reduced its IL taxes using foreign subsidiaries under an 80-20 waters’ edge election. Then again, its as likely that the person posting had no idea what they were talking about when they linked the story to the Bosley amendment.
You are correct in your assessment of 80-20. Most of the amendment that I filed was accepted was in the final version of the bill. What was left out was the 80-20 provision that would have leveled the playing field between foreign and US corporations. By deleting the 80-20 amendments, the bill allows a corporation that is incorporated, for example, in France with 80% of it’s sales, payroll, and property outside of the US to avoid paying apportioned taxes. Yet if a corporation is incorporated in the US, say Massachusetts, and 80% of their payroll, property, and sales are outside the US, they would pay an apportioned tax. My amendment simply leveled the playing field for US corporations instead of creating an advantage for foreign corporations doing business in the US, and put us on par with 8 of the 11 states that use this.
As for the Wal-Mart story, this has risen to the level of an urban legend. If one actually read the story, Wal-Mart PAID their taxes. They tried to work around the taxes and got caught. Since we would have essentially the same statutes as Illinois, this could not happen here either.
Finally, on the figure of $140-170 million being lost if we enacted this provision, the DOR compared apples to oranges. They refereed to Minnesota and extrapolated their figures to account for our larger economy without factoring in the differences in our economies. That was mistake number one. Second, they used the Minnesota law with a two-factor test. Minnesota didn’t use sales in their law and that creates a large problem. We would use a three-factor test. In fact, when Minnesota changed their laws and went to a three-factor test, they didn’t lose money, but reported a gain in corporate taxes.
Fortunately, the conferees that crafted the final version of this bill didn’t listen to the rhetoric, but took time to craft a fair and very good bill, which will raise revenues, create some predictability in our tax laws, and include most of the provisions of my amendment.
for that explanation. I agree with your position, if an 80-20 waters’ edge election is going to be available then it should depend on the substance of the corporation, based on its apportionment factors, rather than the form, based on the geography of incorporation.
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p>And I agree with you that the Walmart story has become an urban legend. Walmart used tax planning strategies that many, if not most, multi-state corporations used. I think people are more concerned with Walmart as a bogeyman than they are with the actual substance of Walmart’s state tax returns.
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p>Thank you for your hard work on this bill. Its clear to me that you have a very good understanding of whats at stake.
I agree with Chairman Bosley that the conferees crafted a fair and very good bill. I should also note that his comment confirms the factual statement in our brief, which Power Wheels appeared to question, that the 80/20 provision added by the House floor amendment was not included in the final bill.
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p>It is a difficult challenge for a state to balance its interest in reducing corporate tax avoidance with its interest in not appearing hostile to business. While I think several of the provisions of Chairman Bosley’s amendment could make it harder for the department of revenue to combat tax avoidance, and the 80/20 provision could have been particularly costly, I agree with him that the process worked. Meaningful reform usually occurs when there is an effort to listen to everyone and to try to make sure that everyone is treated fairly. That is what happened in this case and Chairman Bosley, as he often does, played a very important role in the process – as did the conferees, the administration, and the legislative leadership.
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p> If people are interested in what MBPC has said about the substantive issues in Chairman Bosley’s post, you can look at a brief we wrote about the House bill (available here: http://www.massbudget.org/Corp… ). Those issues are further discussed in our brief discussing the Senate bill, (available here: http://www.massbudget.org/Corp… ) and describing the final bill (available here: http://www.massbudget.org/Fina… ).
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p> But, on this Fourth of July, perhaps what is most important is that the democratic process worked. While I don’t agree with everything Chairman Bosley said, I think he is right about the final result: a “fair and very good bill, which will raise revenues, [and] create some predictability in our tax laws.”
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p>Noah Berger
Massachusetts Budget and Policy Center
But another provision, (3)(i) that I cited above, does not allow an 80-20 corporation that was incorporated in the US to be excluded under (3)(ii). When you say that “the 80/20 provision added by the House floor amendment was not included in the final bill,” I think you should more accurately say that any company incorporated in the US can no longer fall under the 80-20 provision. Regardless, I see that as a provision elevating form over substance. First of all, thats an incredibly easy standard to plan around, given that all you have to do is shift the income producing assets of the US corp that is less than 20% present in the US to a foreign corp, or you could just reincorporate the corp in a foreign country where it is actually doing business. Secondly, and more importantly, why should the inclusion of a a corporation in a MA unitary group when the corp has more than 80% apportionment outside the US depend on whether the corporation was incorporated inside or outside the US?
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p>And I know that you do this for political reasons, but please make an attempt to elevate the discussion rather than just throwing around the “loophole” language whenever you don’t like a particular tax policy decision. I guess your target is non-tax policy experts, and the “loophole” language works with them, but I believe that your reports would be taken more seriously by tax policy experts without the “loophole” language.
but it sounds like you often go out of your way to assist multinational corporations. Shouldn’t you be more concerned with the welfare of the people of your district and of the Commonwealth? What does your water’s edge allowance do for us?
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p>If you’re a Massachusetts employee of a multi-national, you get to keep your job.
Your presumption is that if something is good for a multinational, then it is bad for my district. That is not necessarily so. The fact is that there are many multinationals that operate businesses in Massachusetts and they employ a lot of workers. I think that they ought to be on the same playing field as foreign corporations when it comes to tax policy. I fail to see how that is a radical idea.