Tax & Budget In the News

To paraphrase the great Yogi Berra, it could be "deja-vu all over again." On the brink of a historic move by the governor, House and Senate to close corporate tax loopholes and correct fundamental flaws in our tax code, an 11th hour floor amendment tacked on to the House version of the bill threatens significant reform.

In the face of tremendous opposition voiced by big businesses lobbying, the governor, House Ways and Means Committee and the Senate, supported common sense reforms to close over $400 million in tax loopholes. The Check the Box reform, already in place in 45 states, requires corporations to file as a consistent corporate form on both Massachusetts and federal taxes. This reform alone will close a loophole that currently allows some corporations to avoid paying an estimated $170 million in state taxes.

Another loophole-closing reform, called Combined Reporting, will put an end to the elaborate shell games that some businesses play with out-of-state subsidiaries, avoiding an estimated $220 million annually in state taxes. These schemes leave in-state businesses that pay their full share of taxes at a competitive disadvantage. Twenty-two states comprising a majority of the U.S. economy have already adopted combined reporting laws.

The Senate closed a third loophole by requiring on-line hotel booking companies to pay the full sales tax on the rates they charge consumers rather than the lower rate
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hotels bill the companies.

Here's where the déjà vu comes in. Just as these reforms are on the verge of being passed, the House adopted a complex floor amendment that would reinsert a host of new loopholes and shields for tax avoidance.

According to a letter to legislators from the state's commissioner of revenue, the new House provisions would create new opportunities for tax avoidance and would shield tax accounting schemes from the scrutiny of authorities. The commissioner also points out that, "These changes primarily benefit a limited group of very large, sophisticated, multi-national businesses."

The first of the "new" loopholes I've dubbed the Wal-Mart-McDonald's Loophole. It would allow companies with subsidiaries that claim to have 80 percent of their activity sourced outside of the U.S. to shift profits to these subsidiaries and avoid paying state taxes. A recent Wall Street Journal article explains how Illinois is attempting to collect back taxes from Wal-Mart operations that claim to be chiefly based in Italy. Illinois is similarly pursuing claims against McDonald's for this questionable practice, which the House amendment, if it prevails here, would enshrine in law.

A second measure would allow certain parent companies to reduce their taxes in Massachusetts by lumping together the income and losses of functionally separate business that they own — even if some of the businesses have no presence in Massachusetts. Third, the new House amendment would give a green light to a wide range of other tax avoidance schemes and protect a wide range of future tax-shifting techniques by placing them outside of scrutiny by authorities.

On top of all this, the amendment would create a new tax benefit for any company whose tax rate increases as a result of no longer being able to use loopholes to shift income to out-of-state companies. Such companies would be awarded with the privilege to deduct taxable income equal to the value of whatever income was exposed by closing the old loopholes.

The amendment would skew the playing field between businesses, and leave ordinary taxpayers and in-state businesses to pick up the tab or see cuts in vital public services. It is a canard to frame the issue in terms of how "business friendly" the bill should be, especially when both bills would lower the corporate tax rate — by a whopping 21 percent in the House version and 16 percent in the Senate.

The loophole closing bill currently sits before six lawmakers who will work out the differences between the House and Senate versions. Without new loopholes, the final bill can restore integrity to our tax code and level the playing field among all taxpayers. But as Yogi Berra, also said, "it ain't over 'till it's over."

Deirdre Cummings is the Budget Policy and Legislative Director for MASSPIRG, a nonprofit, non-partisan public interest watchdog group with members across the state.