Snapshot of Findings
|The share of total MA state taxes paid by corporations through their income and related taxes has fallen markedly since the 1980s.||Meanwhile, corporations have collected a growing share of all income generated in the U.S.||Had the corporate tax share not fallen, businesses would have paid another $1.4 billion in FY 2019.||Restoring corporate income tax rates, reducing special business tax breaks, and reforming corporate tax disclosure laws all can help reverse the downward corporate tax trend.||Collecting more taxes from corporations would improve tax fairness and racial equity in MA.|
Businesses in Massachusetts depend for their success and profitability on a wide array of investments made by our state and local governments. These include investments in transportation infrastructure, in a healthy and well-educated work force, in public safety, and in a legal system that enforces contracts and settles business disputes - to name just a few. Businesses help support these public functions through a variety of different taxes, including property, sales and corporate income taxes. While state and local business taxes amount to only a small portion of overall business costs for most U.S. businesses – on average, roughly 2 percent of total costs – business taxes nevertheless are an important source of revenue for communities and for the Commonwealth.
In Massachusetts, the revenue businesses contribute through their corporate excise and related tax payments has dropped markedly as a share of total state tax collections over the past four decades.
Throughout the 1980s, (the earliest years for which fully comparable Department of Revenue data are readily available), collections from corporate excise and related tax payments provided about 15 to 17 percent of the Commonwealth’s total tax collections (see chart, above). During the last decade, that figure has hovered in the 10 to 11 percent range, a drop of about a third since the 1980s. (Corporate excise collections come primarily from taxes on corporate profits, though how such taxes are levied/calculated varies depending on which industry the corporation operates within.)
Had Massachusetts collected in Fiscal Year 2019 an amount of corporate excise and related taxes equal to the share of the total collected throughout the 1980s (on average, around 16 percent of all taxes), businesses would have contributed another $1.4 billion in these taxes to the Commonwealth in that fiscal year. Instead, individual taxpayers - including those with low and moderate incomes - had to pick up a sizeable portion of this cost.
Counterintuitively, this downward trend in corporate excise taxes as a share of our state total has occurred even as U.S. corporate profits have risen markedly as a share of national income (see chart, below). Where corporations collected about 8 to 10 percent of all U.S. income during the 1980s, in the aftermath of the Great Recession corporations have been collecting 12 to 14 percent of national income, a large increase. With corporations claiming a growing slice of the national income pie, this means that a declining share of national income is flowing to workers through their wages and salaries. Over the course of a generation, this shift has helped push household income and wealth inequality to levels not seen in the U.S. since the 1920s, delivering remarkable gains to the highest income households. Meanwhile, many moderate-income households have seen only very modest gains during the last several decades – and many low-income households have seen little or no gain at all.
Taken together, the data in these two charts highlight a growing mismatch: Corporations are capturing a substantially larger share of all U.S. income, but the taxes they are paying on these profits represent an ever-smaller share of taxes collected by the Commonwealth. Over the long term, this is a recipe for depriving the Commonwealth of revenue needed to support the many public goods that allow businesses and people in Massachusetts to thrive - or for shifting much of those costs onto other, non-corporate taxpayers, including low- and moderate-income households.
There is no one reason for this growing mismatch. Changes in the global and national economy, changes in labor laws governing unionization; changes in consumer spending patterns; changes in federal tax policy; the effects of the business cycle – all these factors, and many more, have played a role. Still, while the full picture is complex, it nevertheless is clear that a number of factors closer to home also have contributed to the problem. In 2008, Massachusetts lawmakers approved a phased reduction in the tax rates paid by corporations on their profits, dropping rates from 9.5 percent to 8.0 percent on most corporate profits. Massachusetts lawmakers likewise created new and expensive corporate tax breaks during the last 20+ years, now costing the Commonwealth hundreds of millions annually in lost revenue. And large, multi-state and multi-national corporations have become increasingly aggressive in pursuing tax avoidance strategies that deprive the federal and state governments of revenue. For each of these three sources of corporate tax revenue loss – state rate cuts, state tax breaks, and growing tax avoidance – there exist state-level policy options (see below) that can reduce tax losses and help reconnect rising corporate profits to the state taxes corporations pay.
Policy Options Can Address Corporate Tax Share Decline
Raising Corporate Tax Rates
Raising tax rates on corporate income would be one way to slow - or possibly even reverse - the downward trend in corporate excise and related tax collections as a share of state taxes. It would help rebalance the state’s tax system and generate substantial additional revenue to invest in education, infrastructure, and other areas that would improve opportunities and strengthen the Massachusetts economy.
The current tax rate in Massachusetts on most corporate profits is 8.0 percent. As recently as 2009, however, that rate stood at 9.5 percent (see Appendix A). Restoring corporate rates to their 2009 levels represents one possible approach to rebalancing the tax system. Very broadly speaking, a return to 2009 rates likely would generate something in the neighborhood of $375-450 million of additional annual tax revenue. This amount of additional annual revenue would close roughly a quarter to a third of the $1.4 billion FY 2019 gap discussed above. This additional revenue would come primarily from large corporations, those with over $500 million in annual receipts.
Reducing Cost of Special Business Tax Breaks
Reducing the cost of special business tax breaks is another way the Commonwealth could slow the decline in corporate excise and related taxes as a share of total state collections. Research has shown repeatedly that corporate tax breaks rarely drive major investment or location decisions – and often reward businesses for decisions they would have made even without these incentives. Nevertheless, business groups have been successful in lobbying many state governments, Massachusetts’ included, to provide a wide range of generous tax breaks.
In Massachusetts, businesses are eligible for dozens of different tax breaks. While a number of these are available to all types of businesses, a subset is available only to businesses operating in certain industries or engaging in particular activities. These special business tax breaks cost the Commonwealth over $1 billion annually and have grown significantly in number and cost over the last 20 to 25 years. Three of these special business tax breaks alone – the single sales factor tax break for manufacturers, the single sales factor tax break for mutual fund companies, and the film tax credit – together cost the Commonwealth over $300 million a year. Despite this major investment of state resources, the manufacturing and mutual fund industries together have shed tens of thousands of jobs since successfully lobbying for their respective tax breaks. Analysis by the Department of Revenue meanwhile repeatedly finds the film tax credit to be a remarkably costly and inefficient mechanism for job creation. Scaling back or eliminating these and many other inefficient business tax breaks would help push back against the trend of falling corporate excise taxes as a share of total state tax collections.
Combatting Aggressive Corporate Tax Avoidance
Yet another option is for the Commonwealth to combat the increasingly aggressive efforts of corporations to avoid federal and state taxes. To do this, lawmakers and the general public need to know more about how much profit each corporation is generating, which corporations are using various state tax breaks, and how much these corporations ultimately are paying in tax.
One essential tool in the fight at the state level against aggressive corporate tax avoidance is robust corporate tax disclosure requirements. To achieve their intended purpose – curtailing aggressive tax avoidance and allowing meaningful review of existing state corporate tax breaks – these disclosure requirements need to be company-specific and provide access to select elements of corporate tax filings. These elements include such things as a corporation’s gross receipts and income, apportioned income and taxable income, the amount of excise tax due and paid, and the amount of each tax credit a corporation claims in order to reduce its excise tax. Additionally, this information must be readily available to the public in an easily searchable, online database. With this information, legislators and the public are in a far better position to understand which corporations are aggressively reducing their state tax liabilities and how they are doing so. Lawmakers and the public then can make informed decisions about if and how the Massachusetts’s tax code should be amended to reduce or eliminate various tax loopholes and ineffective, inefficient or unusually costly corporate tax breaks.
While Massachusetts has a corporate tax disclosure law (initially passed through a citizens’ ballot initiative in 1992), it was amended later by the Legislature to make the reports anonymous rather than company-specific, thus eliminating much of the value the data otherwise might bring to tax discussions. Likewise, though the law requires corporations to file tax disclosure reports annually with the Secretary of State, the information from these reports has not been made readily available to the public through a searchable online database or other similar means.
Corporate Taxes and Overall Tax Fairness
Slowing or reversing the downward trend in corporate excise and related taxes as a share of total state tax collections would help turn our state’s upside down tax system right side up, making the overall system in Massachusetts less regressive. (A “regressive” tax system is one in which those with lower incomes pay a larger share of their income in taxes than those with higher incomes do.) This is because a sizable share of the final cost (or “incidence”) of taxes paid by corporations falls on corporate shareholders. Shareholders, as a group, are overwhelmingly among those households with the highest incomes.
Corporate taxation likewise has implications for racial equity. A long history of systemic barriers to opportunity has prevented many people of color in Massachusetts from equitable access to high-paying jobs, education, and other avenues leading to higher household income and wealth, including the acquisition of corporate stocks and bonds. As a result, corporate shareholders as a group are disproportionately White, and thus an increase in the corporate income tax would have the additional effect of reducing tax inequities by race. Federal Reserve Board data for the U.S. show that over 60 percent of White households own some amount of corporate stock (including corporate stock owned directly or in the form of mutual fund holdings). This figure drops to 47 percent for Asian/Other households and to less than a third for Black and Latinx households. Moreover, the median value of corporate stock held by White households who own such assets is $30,000. For Asian/Other households that median is $20,000. For Latinx households it is $10,500 and for Black households, $7,500.
Can Massachusetts Corporations Afford a State Tax Increase?
How would an increase in the corporate income tax affect Massachusetts’ business taxes relative to other states? When all state and local business taxes are taken into account, multiple studies show that business tax levels in Massachusetts are below the U.S. average. In terms of the share of total state and local taxes paid by businesses, Massachusetts is in the bottom fifth of all states. The results of these analyses indicate that the Commonwealth is in a position to raise additional revenue from businesses without placing Massachusetts outside the mainstream in terms of overall business tax levels.
Recent federal corporate tax cuts likewise strongly suggest that businesses – particularly, large, profitable C-corps operating in Massachusetts and elsewhere - are well-able to absorb higher state and local tax costs. The 2017 “Tax Cuts and Jobs Act” (TCJA) cut federal tax rates dramatically on C-corp income, from 35 percent down to 21 percent. Additionally, the TCJA greatly reduced the taxes owed by U.S.-based multinational corporations on the profits they generate through their overseas operations. The net effect of these changes has been a large reduction in federal corporate income tax liability, a tax cut for businesses estimated to be some $140 billion nationwide in 2019 alone. The amount that corporations nationwide will save annually in reduced federal tax payments (due to TCJA) is much larger than the total amount paid by businesses nationwide in state and local corporate income taxes.
Focusing specifically on Massachusetts, it is reasonable to assume that roughly $4 billion of this annual federal tax cut total will go to Massachusetts companies (based on the share of US economic activity occurring in Massachusetts - about 2.8 percent of US GDP). This amount of federal, yearly tax savings ($4 billion) significantly exceeds the total amount of excise and related taxes paid annually by corporations to the Commonwealth. While these federal tax cuts do not directly reduce the state and local tax obligations of businesses operating in Massachusetts, they do free up substantial corporate resources, making any increase to state and local corporate taxes much easier for businesses to absorb.
For sources and endnotes, please view the PDF version of this report.
Source: Massachusetts Department of Revenue