Last week, Massachusetts became the twenty-second state, and the sixth in the last four years, to institute combined reporting, a vital reform that will help to prevent highly profitable businesses from shifting income out of the Commonwealth in order to avoid taxation. In addition, it ended its unique and deleterious "check the box" loophole, which allows corporations to elect a different entity classification for state tax purposes than for federal purposes. Together, these two changes will make the economic playing field in Massachusetts far more level and will ensure that businesses that profit from operating in the Commonwealth pay their fair share towards public services, just as private citizens do. More immediately, they will generate close to $300 million in revenue in FY 2009, thus reducing a budget deficit that, earlier this year, was expected to reach nearly $1.2 billion.
Unfortunately, the long-term contribution that these two changes will make to Massachusetts' fiscal health is mitigated by the fact that state policymakers also felt compelled to reduce the corporate rate from 8.75 percent to 8.0 percent between 2010 and 2012, and the rate paid by financial institutions from 10 percent to 9 percent over the same period. Because of these lower rates, many businesses will, in effect, be allowed to keep some or all of the tax breaks that they took for themselves through avoidance schemes like passive investment companies and captive REITs prior to the advent of combined reporting.
Bay State legislators didn't stop at the corporate income tax, though. They also raised cigarette taxes by $1 per pack, bringing the total excise to $2.51, the third highest in the country. While the change will yield an additional $170 million at a time when the Massachusetts budget is under significant stress, ITEP and others have detailed numerous flaws with tobacco taxes, particularly when they are used to finance on-going programs and services. This appears to be the case in Massachusetts, where the new cigarette tax revenue is expected to help defray the higher-than-anticipated costs of Massachusetts' mandatory health insurance plans.