State and Local Finance
Former Supreme Court Justice Oliver Wendell Holmes taught us that "Taxes are what we pay for a civilized society." The state must collect enough taxes to fund the services we need and do it fairly. Today, Massachusetts faces a revenue crisis caused by more than forty tax cuts during the 1990s that have reduced state revenue by almost $3 billion dollars annually. I have led the opposition to the tax cutting movement and I support closing tax loopholes that raise revenues while easing the property tax burden on Massachusetts’ cities and towns.
Closing Corporate Tax Loopholes
For the last three terms, I have initiated efforts to close corporate tax loopholes, filing the legislation and leading the floor fights on these issues. For years, multi-state companies have exploited loopholes in the Massachusetts state tax system to avoid paying taxes on a large portion of their profits. In fact, the share of total state taxes contributed by corporate income taxes in Massachusetts has dropped from 13.0% in 1989 to only 8.1% in 2000 according to the U.S. Census Bureau. It's unfair for multi-state companies to use our public resources (highways, public safety officers, etc.) while residents and other in-state businesses pick up their tab.
I support enacting the following reforms, which would generate more than $500 million annually by making multi-state corporations pay their fare share and level the playing field for in-state businesses.
- Check-the-Box Conformity According to federal law, companies may select the type of entity they are considered for federal tax purposes (corporation, partnership, etc.). Once a company elects an entity classification for federal tax purposes, states with check-the-box conformity require that the company's classification be the same for state tax purposes. However, Massachusetts is one of only five states that DOES NOT require check-the-box conformity. As a result, companies in Massachusetts are able to shield large portions of their income from Massachusetts taxes. Our neighbors in Connecticut, Rhode Island, Vermont, Maine and New York have all closed the check-the-box loophole.
- Combined Reporting Most large multi-state corporations are composed of a "parent" corporation and a number of "subsidiary" corporations owned by the parent. Under current law, Massachusetts taxes the parent company and each subsidiary separately. This allows companies to shift their profits out of Massachusetts subsidiaries to subsidiaries headquartered in states with no corporate income taxes. Combined reporting essentially treats the parent and most subsidiaries as one corporation for state income tax purposes. Their nationwide profits are added together and each state taxes a share of that combined income using a specified formula, which mitigates the ability of companies to implement tax avoidance strategies across state lines. Combined reporting is necessary for Massachusetts companies to compete effectively with large multi-state corporations. Twenty states have passed combined reporting laws, including New Hampshire, Maine, Vermont, and New York. Governors in Iowa, Michigan, North Carolina, and Pennsylvania this year have also called for the practice.
- Throwback Rule Currently, if a Massachusetts company sells to the federal government or into a state where there is no tax liability, the value of those sales is not counted in Massachusetts’s or any other state’s tax base and is often referred to as "nowhere income." Enactment of a throwback rule would ensure that any sales made by a Massachusetts company to a state or government where it does not have tax liability would be "thrown back" into the company’s Massachusetts tax formula. Twenty-five states with corporate income taxes have already enacted throwback rules.
It is critical that we provide our cities and towns with options other than Proposition 2½ overrides to raise needed revenues. I was an original cosponsor of the act that would close an outdated loophole exempting telephone companies from paying an estimated $78 million in local property taxes on telephone poles and equipment. The exemption was first adopted in 1915 as a measure to encourage universal telephone service, but is clearly unwarranted over ninety years later.
I was also an original cosponsor of the Local Option Meals and Hotel Tax, which would allow cities and towns to adopt a 1-2% meals tax and raise the maximum local room occupancy tax from 4 to 5%. This act would generate $120 million for local governments if every community adopted a 1% meals tax.