Business Taxes in Mass.: Toward Fundamental Reform

4/8/2008

Massachusetts business tax laws are a hodgepodge of poorly conceived measures that violate the most fundamental principles of tax equity and efficiency, according to the Beacon Hill Institute at Suffolk University.

By taxing all business entities similarly and adopting unitary reporting, single-sales-factor apportionment, along with other proposed reforms, the commonwealth could cut the corporate tax rate to 5.3 percent and achieve approximate revenue neutrality according to the Beacon Hill Institute, which details these reforms in its new study, "Business Taxes in Massachusetts: Toward Fundamental Reform," released today.

The Beacon Hill Institute, or BHI, predicts that its proposal would create about 4,000 new private-sector jobs and $120 million in new investment upon implementation, while the state would lose $86 million in revenue or about 0.41% of state tax revenue. 

“This tiny loss in revenue is well worth the economic stimulus and the tax simplification that the proposal would make possible,” said David G. Tuerck, executive director of the Institute and a co-author of the study.

Massachusetts currently levies the fourth highest statutory state corporate income tax rate -- 9.5 percent -- in the United States.  Reducing the tax rate and broadening the tax base, as BHI proposes, would send a signal to the business world that Massachusetts is now a destination for adding plant and payrolls.  The problem of corporate loopholes would disappear as firms found it in their interest to report income in Massachusetts rather than other states, according to the study.

“Massachusetts should strive for a predictable and competitive business tax policy that serves firms, investors, workers, and government in the most optimal manner,” said James Angelini, PhD, director of the Master of Science in Taxation program in the Sawyer School of Business at Suffolk University and the lead author of the study. “A uniform rate covering a broader base would provide a stable source of revenue and promote economic growth.” 

Specifically, the Institute proposes that the Commonwealth: 

  • set the tax rate at 5.3 percent, the same rate as for individuals
    eliminate the $2.60 per thousand tax on tangible personal property or net worth, applicable to C- and S-corporations only
    eliminate the conduit concept by taxing entities at the rate of 5.3 percent at the entity level 
  • eliminate the double taxation of C-corporation earnings (and large S-corporations) by taxing business entities (domiciled in Massachusetts or with nexus) by 5.3 percent at the entity level (as apportioned if multi-state) and eliminating the tax on corporate dividends to C-corporation shareholders or flow-through income from conduits 
  • eliminate the $456 minimum tax on C- and S-corporations
  • adopt combined reporting and unitary tax principles, without a “waters edge” election (for all types of entities, not just corporations)
  • adopt single-sales-factor apportionment for all entities and industries, not just some 
  • allow net-operating-loss carryover deductions by sole proprietors, corporate trusts, and partnerships
  • eliminate all tax incentives
  • allow a 100 percent dividends-received deduction for dividends received by corporations, regardless of the percentage owned 

Against the tide of corporate tax avoidance strategies, the commonwealth could strike a competitive blow by lowering rates rather than simply raising more revenue, according to the study.

“If they are expected to become viable sources of revenue in a volatile economy, business taxes must be reformed in a manner that promotes revenue stability, economic growth as well as equity, simplicity and transparency,” said Angelini. 

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