The road to progress rarely travels in a straight line. Nowhere has that been more evident than in Massachusetts this month, as a major effort to combat corporate tax avoidance could end up being undermined by an eleventh-hour maneuver to permit businesses to continue to exploit weaknesses in the tax code.
About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth. Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation. It is now used in 20 states. Should the House bill be made law, Massachusetts would become the third Northeastern state in as many years to embrace the change.
Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald's. The amendment would constrain the Commonwealth's ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance. Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of "at least $100 million to $200 million" -- or about half of the corporate tax revenue the bill might otherwise be expected to generate! Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent.
Fortunately, as the Boston Globereports, the Massachusetts Senate may reconsider this particular amendment when it takes up the larger reform bill sometime next month. To learn more about the House bill and the impact that it would have, see this latest report from the Massachusetts Budget and Policy Center.