Beacon Hill Institute Weekly Dispatch: Regarding corporate taxes, broaden the base, lower the rate

A basic principle of sound tax policy requires a tax levy with both a broad base (that is to say no or few deductions and exemptions) and the lowest rate possible (so as not to diminish incentives for individuals and companies to work, save and invest).

With its myriad economic development agencies and varied targeted tax breaks, Massachusetts comes nowhere close to having a system that embodies both equity and efficiency or any measure of predictability.  And this is most pronounced when it comes to corporate tax policy.  Both the Fidelity and Evergreen cases prove that legislators fail to grasp essential economic concepts.  This is unfortunate because a sound and flatter, more business-friendly corporate tax policy is one area that liberals and conservatives, populists and entrepreneurs can all agree.

Recently the state auditor noted that a number of tax breaks were negotiated in secret and targeted not only toward industries but specific companies. It is not a surprise that individual companies plead for tax breaks often holding out the carrot of jobs and economic development.   This process clearly elevates political officials who believe they need to create jobs and gain public favor.  But in carving out special deals, legislators create unneeded complexity not to mention foregone revenue. As the Fidelity and Evergreen chapters prove, private companies are pretty good at gaming the tax policy shuffle in Massachusetts. In addition the process is far from transparent.  Tax breaks have been worked out mysteriously in black-box fashion.  What’s clear is the cost. According to the Office of the State Auditor  “The total Tax Expenditure Budget in Massachusetts has grown at nearly double the rate of the state budget over the past five years. Between FY08 and FY12, the tax expenditure budget increased by $ 5.1 billion. By way of comparison, the estimated budget shortfall for FY12 is just over $2 billion, or less than half of the increase in tax expenditures.”

BHI’s last foray into the debate on corporate taxes took place in 2008 but its study is as applicable today as it was when the current policy was debated three years ago.

The corporate tax reform measure passed in 2008 was a tiny step in the right direction by lowering the rate to 8.25 over two years from the effective 9.5% rate. But more needs to be done and that includes bringing most entities under a tax schedule that levies a tax no higher than 5.3%.  

Specifically, the Institute proposes that the Commonwealth:

•set the tax rate at 5.3%, the same rate as for individuals;

•eliminate the $2.60 per thousand tax on tangible personal property or net worth, applicable to C and S-corporations only;

•eliminate the conduit concept by taxing entities at the rate of 5.3% at the entity level;

•eliminate the double taxation of C-corporation earnings (and large S- corporations) by taxing business entities (domiciled in MA or with nexus) at 5.3%.

Many other suggestions were made in the report. In addition, BHI attempted to quantify the economic effects of enacting a broad 5.3% tax. Using its State Tax Analysis Modeling Program (STAMP) we found that under the conditions in 2008 the state would lose $85.89 million in the first year of implementation, or only about 0.4% of current revenues. Local tax revenues would increase by $6.78 million – as local governments gain property tax revenue from businesses increasing the local deployment of capital and labor. The net effect is that the proposals would cause state and local tax revenues to decline by $79.11 million in 2009.

As the Institute wrote at the time, “This miniscule loss in revenue is, we believe, a small enough price to pay in order to achieve equity in the taxation of both persons and business and to turn the state tax code into an engine for attracting, rather than repelling, business.”

There are also the dynamic effects. In the Year 2009 from which we based our projection, the state would have created 4,025 new private sector jobs. Moreover investment would increase by $119.73 million and real disposable income by $255.31 million.

It is not unreasonable to suggest that were such a proposal be enacted today roughly the same positive effects would be the results if a  cleaner corporate tax code proposed by the Institute were to become law.  

Most importantly, however, the proposal would put a permanent end to the Commonwealth’s crazy quilt of business tax laws, along with its sky-high tax rate on corporations.

Here is what’s been happening at the Institute.  This week,  CBS4’s Jon Keller recently interviewed BHI’s Executive Director David G. Tuerck on whether Massachusetts still deserves the label, “Taxachusetts.”

A recent BHI briefing” looked at which items American are paying more for over the past year.  

And the latest issue of Economic Indicators offers a final 2010 tally of unemployment in the state’s largest metropolitan regions.

Our research on the Oregon “bag tax” was picked by the Reason Foundation’s “Out of Control” blog.

Our work on Project Labor Agreements was cited recently  in Maury Baskin’s Government-Mandated Project Labor Agreements: The Public Record of Poor Performance (2011 Edition).

About Beacon Hill Institute

The Beacon Hill Institute engages in rigorous economic research and conducts educational programs for the purpose of producing and disseminating readable analyses of current public policy issues to voters, taxpayers, opinion leaders and policy makers.