Tax Policy

A few weeks ago, the House of Representatives passed a tax measure that created a system of combined reporting for corporate tax payments and a system called "check the box" as a determinate as to how one files in Massachusetts in the same manner as their federal tax filings. It also, over a number of years, lowered the corporate tax rate. This would do two things. It would provide a boost in state revenues this year and it would give in-state corporations a tax break over a number of years while eventually getting to a rate that was revenue neutral.

I filed an amendment to this that gave some specificity and predictability to the bill. I didn't think it would be very controversial. It was not meant to advantage the state or corporations as to the tax filings, but was meant to give everyone a clear understanding of what was expected of them. Well, I was wrong. There has been a tremendous amount of controversy over this amendment. That is unfortunate as I believe that we need corporations to pay their share in taxes, but we need a system where everyone knows what the rules are.

I have heard that this amendment was passed in the "dead of night". The amendment was filed along with other amendments early in the day and as a matter of fact, I was asked about it throughout the day's deliberations. A large number of progressive legislators sat in the Speaker's office along with the chairman of the Revenue Committee and myself and had a lengthy discussion of this bill. I was ready to debate or explain this if necessary on the floor, and we knew that if there were questions, the Senate had yet to take this bill up and we would have plenty of time to work on any issues before a bill was enacted into law.

I have read all sorts of comments on this since, mostly on blogs, but also email and newspaper comments. Much of what I have read isn't true. Corporate tax policy is very complex and arcane. There are no "loopholes" in the law, only tax policy. When we reform policy in an area that is so complicated, it isn't easy and a lot of issues surface. In this instance, we layered tax policy on top of existing tax policy and that has many different ripple effects on existing tax policy elsewhere in the statutes. We need to account for this. That is what I attempted to do in my amendment. The following is a reply to a post on Massachusetts Liberal's blog site. I don't know who the blogger is who runs this site, but he or she is fair and intelligent. This is my reply to their post on this issue.

“There are three basic arguments that I will try to make as succinctly as possible. That said, this is corporate tax policy and it is incredibly complex and arcane. That is one of the problems. We had an opportunity to change our tax policy, closing opportunities to game the system while making it much fairer and simpler through the tax commission, but that was not to be. So what we are now attempting to do is place a combined reporting statute on top of all other tax law in Massachusetts and it is a difficult fit.

I had no idea that this would be controversial. It was an amendment was in the hands of the clerk all day long and no one raised any objections until late in the day. And it is an amendment that seeks, not to give business or the Department of Revenue (DOR) an advantage over the overall goals of the legislation, but seeks to provide specificity to the policy therein. Most businesses that I have talked to have thrown up their hands and said that they understand that combined reporting is coming. But they aren’t sure what that means, as there are no specifics behind the original proposal. That troubles them and troubles me as it gives enormous power to DOR to set not just regulations over tax collection, but over tax policy. That concerned me and many of my colleagues in the House. I was attempting to provide transparency and predictability to our combined reporting bill. Now to the three issues:

First, there are very few tax attorneys among those who are criticizing this bill and we have heard a lot of rhetoric. Take, for instance, the Wall Street Journal article concerning Wal-Mart. What is lost in the rhetoric is that Illinois disallowed this tax shelter scheme and collected the taxes from Wal-Mart. It is now in court and I believe that Illinois will win. My amendment states that the corporation can claim 80-20 foreign status if 80% of their receipts, payroll, or property is sourced outside the US. In a state where we go after income derived in state from out of state taxpayers that may have made money here, I doubt we are going to accept that a foreign “paper” corporation is the source of payroll, receipts and property located within the boundaries of the state, or the country under combined reporting. Also, this “safe harbor” for legitimate outside taxes that have no nexus under combined reporting is something that DOR agrees with in principle. They have, however, failed to suggest alternative language.

There are other reasons for placing some percentage within the bill. Other states have similar provisions. Some have suggested that foreign countries take a dim view of our going after taxes they think are rightfully theirs. It may cost us more in time, audits and personnel to go after the taxes than they are ultimately worth. There are other issues that have been raised, such as apportionment (which tries to get to the policy of apportioning tax from different states with different tax policies), but this seems to be the focus for everyone’s ire.

Second is my suspicion of DOR numbers. I am very leery of their numbers for good reason. In this bill, their revenue figure for the administration’s proposal was tens of millions greater than their figure for House generated revenues even though the language of the bill was identical coming out of committee! This is not the first time this has happened, raising, I think, legitimate questions about their numbers. In the Life Science bill, my committee asked for an analysis of extending the Governor’s tax breaks without the yearly limitations included in his bill. We asked several times and were told they could not answer the question nor should they as the Governor’s bill limited tax credits to $25 million per year. Not only is it not their role to refuse a request based on policy, but it calls into question the honesty in delivering numbers in a timely and accurate manner. After being requested again by House Ways and Means, a report was sent to us on the effect of the administration’s suggested tax credits. In looking at the numbers, it was immediately apparent that the numbers were suspect. One company had given us a figure, based on their tax liability that was larger than the DOR number for every life science company eligible for this credit. The second set of numbers we received were just as bad. I believe that the Department of Revenue based on their responses, is more interested in setting policy than enforcing it. It is the responsibility of the Governor and the Legislature to set tax policy. The Department of Revenue should provide revenue analysis that is not tainted by politics or policy. In these cases, it appears that this may not be the case and that troubles me. However, people shouldn’t take my numbers at face value either. I believe we need an independent budget office to give us honest estimates without political pressure from any side. We need an office like the Congressional Budget Office – bipartisan and independent to study all our fiscal and revenue proposals for their cost and financial impact. This is the only way we can get numbers that are beyond question.

Third, it is clear to me that this issue is not about tax fairness, but increased taxes. If that is the issue, we should stop using the words “closing tax loopholes” and have an honest discussion on what a fair tax is for corporations. But that discussion should also be about what we want our economy to look like. If we are closing tax loopholes, should we open another seven of them in the life science bill? More importantly, we need to look at corporate tax policy in the context of cost here in Massachusetts. I hear very few businesses complain about taxes in Massachusetts. But we have the highest electric rates in the continental United States, the highest health care costs, the second highest unemployment insurance rates, much higher than US average wage rates, land development costs, regulatory costs, housing costs and transportation costs to name some of the factors of doing business in Massachusetts. We are still down over 90,000 jobs behind our 2000 figures and we are making it increasingly difficult to do business here. We need to take that into account.

A good friend of mine who passed away many years ago used to ask me, “Is it the first straw or the last straw that broke the camel’s back? It is the synergistic accumulation of straw.” If we pass this bill without clarification and predictability, business will not pack up en masse and leave the state. But they will make decisions based on what their costs are in other states versus the ability to be successful here. That is a shame as there are a lot of good reasons to build a business here. But we never get to those reasons as our above the line costs make decisions easy for firms to locate elsewhere. I am not suggesting that we roll back taxes for businesses. I am suggesting that we should be intelligent with our tax policy and if we are going to tax businesses with increased policy such as combined reporting, we let them know what the rules are with precision, specificity, predictability, and transparency. After closing “loopholes” several times over the last four years, we need to let the business community have a level of comfort that they can plan based on the law. That was the amendment that I filed attempted to do.”

The entire post can be seen here: http://baystateliberal.blogspot.com/