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Print Edition StoriesFriday, August 28, 2009
How I See It
State tax combined-reporting is unwise, misdirected
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The Massachusetts Department of Revenue (DOR) has now issued the combined-reporting regulations called for by the new corporate tax law enacted in July 2008. This is the final step in a long and difficult process — and like each previous step, it leaves the business community extremely frustrated and disappointed.
When the Patrick Administration filed “An Act Improving Fairness of the Tax Laws,” it stated that the legislation was necessary to “close several tax loopholes ... that create an uneven playing field for business and cost the commonwealth hundreds of millions in lost revenue. Closing these loopholes will not hurt our competitiveness or place an onerous tax burden on businesses. … In addition, none of these reforms target existing economic development tax benefits. On the contrary, these reforms are a first step toward achieving equity and fairness in a tax system known to be unfair and cumbersome.”
Throughout the legislative process, the business community argued that the specific proposals did not match the administration’s rhetoric. We warned legislative leaders and the administration’s senior staff on numerous occasions that enactment of combined reporting would harm our competitive position, would not close loopholes but rather fundamentally change the state’s corporate tax laws, would not bring in new revenue that was forecast and would place a significant new compliance burden on business.
Our arguments fell on deaf ears. DOR provided the Legislature with the rationale they were looking for — that the commonwealth would obtain millions of new dollars in revenue from corporations not paying their fair share.
DOR’s 71 pages of final regulations hardly reflect greater simplicity. The new combined-reporting regime is far more complicated than the previous corporate tax code. The most seasoned tax professional will have difficulty digesting, understanding and complying with the numerous new rules, some of which are inconsistent with the principles of combined reporting.
Just as greater tax simplification has not been achieved, the promised new revenue has not come and may never appear. This initiative has only increased the commonwealth’s dependence on a highly cyclical revenue stream, exacerbating revenue losses in a down economy. And in the long run, it may actually delay the recovery of business tax revenue: The Organization for International Investment, representing 150 of the largest U.S. subsidiaries of companies based abroad, has stated that the regulations could significantly damage the reputation of Massachusetts in the business community with negative investment consequences for the commonwealth.
Meanwhile, the combined reporting regime is already beginning to have a negative impact on economic development and jobs by undermining long-established tax incentives. For example, DOR’s regulations have diminished the value of the single-sales apportionment for the Massachusetts-based mutual fund industry and will reduce the value of the research and development tax credits. One major Massachusetts employer that was considering expansion here has found that combined reporting has significantly devalued the state’s economic opportunity area credits, a primary tool for offering incentives to businesses to expand or relocate to the state. This situation could mount a significant challenge to the commonwealth in attracting new investments into the state’s economy.
Massachusetts may not be ready to abandon combined reporting as a failure, but it should at least take steps to make it workable. Associated Industries of Massachusetts and other business groups strongly support bill No. 2694, filed by state Rep. Daniel E. Bosley, D-North Adams, to address some of the more problematic provisions of the law. Passage of this bill will lessen some of the business community’s frustrations with the current statute, and provide the Legislature with an opportunity to take control of the state’s tax policy to avert further harm to the commonwealth’s reputation and economic prospects.
Richard Lord is president and CEO of Associated Industries of Massachusetts (AIM), an employer association of more than 6,500 Bay State businesses and institutions.
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