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Working To Close Corporate Tax Loopholes
Current tax loopholes, totaling over $500 million a year, allow mostly out-of-state businesses to avoid their fair share of taxes. In-state and small businesses who do not get to take advantage of these loopholes cannot compete on a level field. Further, and more importantly, those of us paying our fair share are left to foot the bill for providing vital services such as transportation, education and public safety.
Big multi-state and multi-national corporations use high-priced lawyers and sophisticated accountants to avoid paying Massachusetts taxes. The loopholes they exploit are technically legal, allowing multistate businesses to shift their Massachusetts profits to out-of-state subsidiaries to avoid paying taxes here. Businesses that do not have subsidiaries in other states cannot take advantage of these loopholes or other tax shell games.
“Businesses should thrive based on their efficiency and innovation, not their creative tax accounting and tax avoidance,” argues MASSPIRG Legislative Director Deirdre Cummings.
To make sure that slick accounting and corporate practices aren’t taking money away from schools, roads and public health, MASSPIRG is pushing to close the following loopholes:
Combined Reporting—In the past two months, New York and West Virginia have adopted “combined reporting”—a way to prevent companies from shirking tax duties by hiding money in out-of-state subsidiaries. Governors in four states have proposed joining the other 19 states that have already modernized their tax code and switched to a combined reporting tax system.
“States have been duped by the tax shell game long enough,” said Cummings. “Years from now people will shake their heads and wonder why states ever tried to collect taxes the old way.”
“Check The Box”— Some businesses designate themselves as a corporation at the federal level and then avoid taxes by telling state authorities they are a trust or partnership. This reform would require corporations to choose to be assessed state taxes under the same corporate structure as they choose to be classified federally. Massachusetts is one of only five states that have not yet closed this loophole by requiring businesses to “check the box” and designate a consistent corporate classification.
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Insurance Companies Operating Non-Insurance Businesses—Insurance companies have long been granted lower tax rates on profits because the prices they charge for insurance are regulated. But many insurers have branched into other unrelated business activities where there is no justification for not paying taxes on profits. There is no reason that businesses competing against the subsidiary of an insurance company should be put at a competitive disadvantage. Insurers should be taxed at the same rates as other businesses when they engage in non-insurance activities.
Telecom Loophole—The telecom loophole dates back to 1915, when the government provided incentives to bring telephones to every home. Back then, the industry consisted of only one phone company, Bell Telephone, which had publiclyestablished profit margins. Today, every utility from NSTAR to Comcast pays property taxes on aboveground poles and wires and/or their switching equipment, while telephone companies like Verizon are exempt.
Deeds Excise Loophole—The deeds excise loophole allows companies that create a temporary shell “partnership” to avoid the real estate transfer tax. Companies can dissolve the partnership without ever paying the excise tax, which is then borne by other taxpayers. Closing this loophole would put the burden of the tax back on the companies that profit from corporate shell games.
The Internet Hotel And Reseller Loophole—Currently, tax law allows Internet hotel booking companies like Hotels.com or Expedia. com to avoid paying hotel and motel tax on the full price of the room as charged to the consumer. Although the consumer pays tax on the higher retail price, the state only receives the amount on the lower, wholesale price.
Loopholes like these discourage local businesses that lack the resources of large corporations—by placing the largest burden on the “good guys,” who, by following the rules, pay more than their fair share of state taxes.
Gov. Deval Patrick filed bills to close these loopholes in February. MASSPIRG will be working to build support for these loophole closings in both the legislature and among business leaders.
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