Beyond the box

government often uses task forces and special commissions in a somewhat dubious fashion — either as a graveyard for an initiative by burying it in endless analysis, or as a rubber stamp for the initiative by stacking the commission with allies who will provide ostensibly objective third-party support.

So it was with some initial skepticism that the members of the state’s Study Commission on Corporate Taxation began our meetings in May 2007. House Speaker Salvatore DiMasi and Gov. Deval Patrick were in sharp public disagreement on the governor’s “loophole-closing” legislation, and we had seen no indication that attitudes were softening. The commission seemed like it might be a waste of time, but it turns out to have been a shrewd political move that may well have an enduring impact on state tax policy.

There were 15 of us on the commission, and perhaps our first clue that it might be a little different was the fact that many members didn’t know whether the governor, the speaker, or Senate President Therese Murray had appointed them. The press release announcing the commission members was issued by all three leaders, and it’s tough to “stack the deck” if the members are not exactly sure who put them there. Still, the group was fairly evenly split between members open to the governor’s legislation and members either opposed or skeptical.

The early meetings gave no indication that we would ever be able to reach consensus on any of the issues under consideration. There were two immediate challenges. First, the mandate of the commission was incredibly broad. We were asked to review and make recommendations on the loophole-closing legislation filed by the governor (House 3756) and study the modernization and simplification of the current business tax laws of the Commonwealth. Second, time was short. The commission was charged with filing an interim report with legislative recommendations for providing revenue for the next fiscal year by June 15, 2007, and a final report on long-term changes to corporate tax laws by January 1.

The early meetings involved presentations by Department of Revenue officials explaining the initiatives in the governor’s bill, plus general discussion by commission members. It was immediately clear that the commission was not going to support any significant changes to current law in the interim report. Most of the members, even those who were supportive of provisions in the governor’s bill, felt strongly that these issues needed to be studied, and there was simply not enough time to do so in advance of the June 15 deadline.

In addition, the early meetings were somewhat politically charged, with presentations from many members, both pro and con, taking relatively hard-line positions. As a result, the only initiative voted on by the commission for the interim report was the proposal to require businesses to file using the same corporate status in Massachusetts as they do on their federal and other state returns—the “check the box” rules.

Of all the initiatives contained in the governor’s legislation, the check-the-box proposal should have been the most uncontroversial. At this time, Massachusetts is the only state in the country that allows companies to call themselves a corporation at the federal level and then identify themselves differently at the state level. This mismatch between the rules in Massachusetts and other states has, not surprisingly, created “planning” opportunities that have allowed taxpayers to reduce their Massachusetts taxes.

There is absolutely no policy justification for this situation—and we heard no justification offered in our commission meetings—and the move to bring Massachusetts into conformity with federal and other state systems should have been done years ago. However, given the political tensions that were so evident in the early meetings of the commission and a reluctance to take any action without further study, the issue was only approved by an 8-7 vote.

As the commission adjourned for the summer, there was a palpable sense that we would never reach consensus on any of the important issues under review. I remember fellow member Robert Tannenwald, vice president and economist from the Federal Reserve Bank of Boston, remarking, “Is this going to be just another task force report gathering dust on the shelves of state government?”


Over the summer, we broke up into subcommittees, each charged with reviewing a specific issue and reporting back to the full commission. The decision to establish subcommittees was incredibly important because they could meet separately, outside of the glare of the large public meetings of the full commission, and focus on policy rather than politics.

I served as the chair of the Subcommittee on Combined Reporting, which was the initiative carrying the biggest revenue impact and an issue that has been at the forefront of state tax policy debates for over 20 years. I vividly remember the debate in the 1980s when Massachusetts first proposed to adopt combined reporting, or unitary taxation. At that time, we would have been one of the first states to adopt the idea, and critics argued vigorously that such a move would send a message to the corporate community that Massachusetts was a hostile place in which to do business.

The concept is relatively straightforward. Combined reporting is a method of allocating the income of multi-state businesses to the different states in which they operate. It requires affiliated corporations to file as a group and to determine the portion of the combined income of the group that is attributable to a state based on the overall apportionment factors — typically property, payroll, and sales — of the group. The principal argument in support of combined reporting is that it restricts the ability of a multi-state business to shift income away from the state where the income was earned to low-tax or no-tax states.

For example, under current state law, a Massachusetts company with valuable trademarks could transfer them to a subsidiary in a low-tax or no-tax state and then pay that subsidiary for the right to use them. The arrangement would allow the Massachusetts company to claim a tax deduction for the trademark licensing payments while shielding the income earned by the subsidiary from Massachusetts taxation.

Since the mid-1980s, when Massachusetts first considered adopting combined reporting, the national landscape on the issue has changed dramatically. The charge in the 1980s that Massachusetts would be “way out front” if it adopted combined reporting was accurate, even if many would point out that being out front is often a good thing. Now, however, 22 states use combined reporting, and many of the technical issues involved — including the definition of a unitary business and the distinction between business and non-business income — have been clarified by case law and regulatory decisions from other states.

In addition, the sophistication of state tax planning for businesses has evolved dramatically in the last 20 years. As a result, businesses are now able to avoid paying taxes in separate entity states, such as Massachusetts, through a variety of schemes that would be thwarted by combined reporting. A study by the state Revenue Department showed that over the last 10 years corporate profits in Massachusetts had grown by more than 70 percent, but the corresponding business tax collections had increased by only 49 percent.

Speaking as only one member of the Subcommittee on Combined Reporting (and as someone who actually enjoys discussions on tax policy), I found our meetings and discussions extremely interesting and informative. The other members of the group included two expert tax practitioners, Jane Steinmetz from Price Waterhouse Coopers and Karl Fryzel from Edwards, Angell, Palmer & Dodge, and two experts on state tax and fiscal policies, Michael Widmer, president of the Massachusetts Taxpayers Foundation, and Tannenwald of the Fed.

Our discussions covered a wide range of issues, but the initial focus was on the question of which system of taxation, separate entity or combined reporting, would produce a fairer, more accurate accounting of the Massachusetts income of a multi-state business. On that issue, I was surprised at the lack of intellectual challenge to the fairness of combined reporting. The main criticisms were that combined reporting introduces complexities that increase the costs of compliance for businesses and that they complicate the audit process — resulting in cases that, for example, dragged on in California for as many as 20 years. These criticisms seemed dated, and, in fact, more than balanced by the fact that as more and more states have adopted combined reporting systems, the familiarity of taxpayers and administrators with the details and requirements of combined reporting has increased dramatically.

Supporters of combined reporting emphasized that combined reporting fairly allocates the income of a multi-state business to the state in which it is operating and is the best way to restrict the ability of multi-state businesses to shift income to low-tax or no-tax states. Keith Davis, executive director of the North Carolina Tax Commission, told the subcommittee that the decision to recommend his state adopt combined reporting was “not a close call.”

The Subcommittee on Combined Reporting took two votes. The first was whether the subcommittee would support a recommendation to adopt combined reporting in Massachusetts. Widmer asked to amend the proposal to require that adoption of combined reporting be based on a reduction in the corporate tax rate so that the proposal would be “revenue neutral.” With that amendment, Widmer voted in support of the recommendation, which passed on a 4-1 vote, with Steinmetz the only dissenter. The subcommittee then voted on a recommendation to support combined reporting with no requirement that it be revenue neutral and the vote in favor was 3-2, with Widmer now voting against.


The full commission met again in early December, and there was a notable change in tone. The Patrick administration had correctly recognized that many of the initiatives in the governor’s bill had opposition on the commission and did not produce enough revenue to be worth the fight. For example, the proposal to tax non-insurance businesses run by insurance companies had generated strong opposition and would only have produced $23 million in annual revenues. So the administration decided to drop these minor initiatives and to support combined reporting with a “substantial” reduction in the corporate tax rate of 9.5 percent. Given that the Revenue Department estimates combined reporting would yield more than $300 million annually for the state, it was clear that both a revenue increase and a cut in the corporate tax rate could be achieved.

While a number of commission members continued to push for revenue neutrality, a key moment in the meeting came when commission member Rep. John Binienda, House chairman of the Legislature’s Committee on Revenue, expressed support for combined reporting and stopped short of insisting on revenue neutrality. Binienda’s support was the first public indication that the House’s sharp opposition to the centerpiece of the Patrick Administration’s loophole-closing proposals — combined reporting — might be softening.

The final meeting of the commission took place on December 18. Secretary of Administration and Finance Leslie Kirwan, the chair of the commission, set the agenda by asking each member to state whether they were in favor of check-the-box and combined reporting and whether such support was contingent on a “meaningful” reduction in the corporate tax rate or on achieving revenue neutrality. With all issues lumped into one vote, commission members were allowed to express their views on combined reporting and a tax rate reduction.

The tentative vote at the meeting was 10-5 in support of a recommendation that included three parts: combined reporting, check-the-box, and a “meaningful” rate reduction but not a requirement that the rate reduction achieve revenue neutrality. Upon issuance of the final commission report, the vote dropped to 9-6 because one member, Steinmetz, felt that the corporate tax rate reduction needed to be specific.

Meet the Author
The commission’s final report was issued on December 28. Subsequently, on January 22, Gov. Patrick submitted legislation to implement the commission’s recommendations, including adoption of combined reporting and check-the-box. The governor’s bill calls for a reduction over several years in the corporate tax rate from 9.5 to 8.3 percent. The governor’s initiative was followed by an announcement from Speaker DiMasi that he would propose legislation adopting the main commission recommendation of combined reporting and check-the-box, but also calling for a specific corporate tax rate cut to 7 percent. The speaker’s statement was a dramatic indication that the commission’s work would not be in vain. In fact, it now appears that the commission’s work may serve as the blueprint for the most significant change in corporate tax policy in Massachusetts in several decades.

Stephen W. Kidder is managing partner at Hemenway & Barnes in Boston. He served as the Massachusetts commissioner of revenue from September 1987 to January 1991.