Massachusetts: Stopping Tax Avoiders with One Hand, Rewarding Them with the Other?

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In Massachusetts, there now appears to be a growing consensus that the state should put a stop to tax avoidance by highly profitable multi-state and multi-national corporations and adopt what is known as combined reporting. Earlier this year, the state's Study Commission on Corporate Taxation recommended moving towards combined reporting. Governor Deval Patrick included legislation to achieve that goal in his FY 2009 budget proposal, while Speaker of the House Sal DiMasi has also recently expressed support for the change.

There is far less agreement, however, about what to do with the nearly $500 million in additional revenue that combined reporting and other important tax reforms would ultimately yield. Governor Patrick would use a portion of that revenue to reduce Massachusetts' corporate income tax rate and Speaker DiMasi would use nearly all of it on such a rate cut. Yet, as ITEP's Jeff McLynch pointed out in testimony before the Massachusetts legislature earlier this week, lowering the corporate income tax rate would force the state to make larger spending cuts to close a $1.2 billion budget deficit and also preclude longer-term and far more economically productive investments in areas such as higher education, worker training, and public infrastructure. Just as importantly, lowering the corporate income tax rate in conjunction with a move to combined reporting would simply allow many businesses to keep the tax breaks that they took for themselves through avoidance schemes like passive investment companies and captive REITs.

The Massachusetts Budget and Policy Center has weighed in on this debate as well, issuing two new reports: one describing the state's tax system generally and another discussing the shortcomings of plans to reduce the corporate income tax rate.

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