The debate surrounding Governor Deval Patrick’s proposal to increase the state income tax has nearly obscured the fact that the plan also includes more than $500 million in new business taxes. The corporate levies not only threaten job growth in a persistently fragile recovery, but also take aim at key technologies that Massachusetts companies use to improve efficiency.
“At a time when so many other states are moving to reduce corporate taxes, these proposals do the exact opposite by making significant tax law changes that exacerbate the climate of uncertainty around the state's tax structure. This uncertainty will reduce Massachusetts' ability to compete for business investment and jobs," said Paul O'Connor, head of taxation for EMD Millipore Corporation and Chair of AIM's Taxation Committee.
“This and other pending tax proposals are troubling and counter to the legislatures past efforts to create a more positive and consistent business climate."
Here are the proposed tax increases and what they mean:
Eliminate the FAS 109 deduction ($76 million)
The proposal to eliminate of the FAS 109 deduction signals the commonwealth’s intent to reverse an agreement reached as part of the 2008 “combined reporting" tax policy change.
Combined reporting brought income from companies' operations in other states into a unitary or "combined" Massachusetts tax return. The FAS 109 deduction was adopted to avoid penalizing companies after the fact for making capital investments. (FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences.)
The deduction has been delayed twice and now the administration's budget proposes to eliminate it without allowing companies to realize the deduction as enacted by the Legislature and signed by the governor.
Impose sales taxes on data processing, cloud-based computer services and custom software ($265 million)
The proposal to tax cloud computing - which uses a network of remote servers hosted on the Internet to store, manage, and process data – would affect computer services, data processing and custom software. The tax flies in the face of efforts by Massachusetts companies, individuals and government to leverage technology as a way to reduce costs and achieve economies of scale in a high cost state.
Most states recognize these data-processing and cloud-computing services as “business or economic inputs” that are key to economic development, business expansion and associated job growth. Adding a tax to such inputs creates economic distortions by “pyramiding” - that is the tax is levied at multiple levels and as a result the “effective tax rate” exceeds the actual sales/retail tax rate.
It is also important to note that the expected revenues from this provision are based on the 4.5 percent sales tax rate proposed by the administration. If the sales tax remains at its current level of 6.25 percent, the estimated impact to the business community from taxing computer services would grow from $265 million to $370 million annually.
Increase taxes on security corporations and utilities ($83 million)
The proposal would eliminate the classification for security corporations and utilities. Those levies would represent a major tax increase on companies that engage in buying, selling, dealing in, or holding securities; as well as on those that deliver electricity, gas, water and telephone services. Both industries are key elements of the Massachusetts economy and the utility tax has implications for employers and consumers who already pay the highest electricity rates in the nation.
The administration tax plan also seeks to move toward market sourcing ($35 million), under which Massachusetts would source sales, other than sales of tangible personal property, to the Bay State for sales factor purposes if a corporation’s “market” for the sale is in Massachusetts.
Finally, the proposal would limit the film tax credit ($40 million).
AIM strongly urges the Legislature to reject the business-tax increases in the proposed budget. We note that none of these proposals has received a hearing before the Joint Committee on Revenue. Targeting taxes on the tools of efficiency will throw sand in the gears of an economy already struggling to build up steam.
Please contact me at 617.262.1180 or email@example.com to learn more about the administration's tax proposal.