Taxes in Massachusetts

Corporate Income Tax

The corporate income tax is usually seen as a progressive tax, since the direct beneficiaries of corporate profits tend to cluster at the top end of the income scale (see Table 6 below).³² The immediate incidence of the corporate income tax, however, is on the corporation itself, not the owners of the corporation. This complicates an analysis of who ultimately pays the tax. But it points to a further logic for imposing reasonable taxes on corporations: corporations rely on government services such as transportation infrastructure, police and fire protection and they benefit from good public schools that can train the highly skilled workers they increasingly need.

While stockholders and investors pay the short-term costs of the corporate income tax, over the long-term some of these costs are shifted to consumers through higher prices and to workers through lower wages. Therefore, looked at long-term, the corporate income tax is not quite as progressive as it seems at first.³³

The corporate income tax is even less stable than the personal income tax, since corporate profits tend to react even more strongly to economic conditions than does personal income. Also there is a fundamental adequacy issue with the corporate income tax, since corporations are able to find ways to shield their income from state taxation. This can also create horizontal equity problems, since some corporations will have the resources to be more successful in finding loopholes than others.

A Brief History of the Massachusetts Corporate Income Tax

A corporate income tax, called the corporation excise tax, was adopted by Massachusetts in 1919. Massachusetts has a 9.5 percent flat rate on most corporate income; certain kinds of corporations have different rates — 10.5 percent for financial institutions, 6.5 percent for utilities, and 2 percent of premiums for insurance companies.

Some Recent Corporate Income Tax Changes in Massachusetts

• To determine how much of a multi-state company’s profits should be taxed in a state, states use a formula that looks at how much of the company’s sales, property, and payroll is in the state. (For a more extensive discussion of the corporate income tax see Michael Mazerov, The “Single Sales Factor” Formula for State Corporate Taxes: A Boon to Economic Development or a Costly Giveaway?³⁴). Massachusetts historically used a formula that counted sales twice (double weighting). In 1994, Massachusetts adopted a single-sales formula (not counting property or payroll), for mutual fund companies, and in 1996 manufacturers also received similar treatment. These changes cost the state about $268 million in revenues in fiscal year 2007.³⁵


• In July of 2008, Governor Patrick signed legislation to close certain corporate income tax loopholes, including implementing combined reporting, and conforming to federal rules to prevent companies from filing as partnerships in one state and corporations in another. The corporate tax changes also include a reduction in the corporate income tax rate from 9.5 percent to 8.0 percent over four years, which would cost about $200 million per year at current collection levels. These changes are estimated to raise $291 million in fiscal 2009 and approximately $163 when fully implemented.³⁶

How Massachusetts Measures Up in Corporate Income Taxes

Massachusetts collected $1.9 billion in corporate income taxes in fiscal year 2006. This was 4.4 percent of state and local own-source revenue, and 6.1 percent of state and local taxes. This tax was entirely collected by the state.

Corporate income taxes made up 3.1 percent of national state and local own source revenue, and 4.4 percent of national sate and local taxes. States collect 89.7 percent of these corporate income taxes.

Corporate income tax collections were equal to 0.6 percent of personal income in Massachusetts in fiscal year 2005. Massachusetts ranked 9th in share of personal income tax paid in corporate income taxes (see Table 7).

For all 50 states, corporate income taxes equaled 0.5 percent of personal income. The state with the highest share of personal income paid in corporate taxes was Alaska at 3.3 percent, much of this was taxes paid by oil companies. Four states have no corporate income tax.

³² Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2004, December 2006.

³³ Congressional Budget Office, The Incidence Of The Corporate Income Tax, March 1996.

³⁴ Center on Budget and Policy Priorities, September 2005.

³⁵ Executive Office for Administration and Finance, Commonwealth of Massachusetts, Tax Expenditure Budget, Fiscal Year 2007.

³⁶ For more information on the recent closing of corporate tax loopholes, see our recent report available at http://massbudget.org/FinalCorporateTaxReform%20(2).pdf.