What more exciting subject could there be besides “tax expenditures” to write about today? I can think of nothing else that I would rather do over this weekend than study the new report from the Massachusetts Taxpayers Foundation on Massachusetts tax expenditures. Lets dive right in.
As budgets become tighter and tighter these so called tax expenditures are being examined everywhere. As a candidate for elective office this past year it was a major issue in my race, with all of the primary candidates from the Democratic side, myself included, pledging to examine such expenditures in the state budget and eliminate those that did not make sense. These so called tax breaks for larger corporations, in many cases ostensibly given to protect jobs, have been creating controversy for some time. Take a look at this from the Boston Globe in 2010.
The Great American Jobs Scam,’’ a book by Greg LeRoy, executive director of Good Jobs First — a Washington-based non-profit that promotes corporate accountability in economic development — chronicles what happened in 1995 in Massachusetts. That’s when Lexington-based defense contractor Raytheon Corp. threatened to move its defense operations out of the state if it didn’t get an extensive package of tax cuts. With about 16,000 Raytheon jobs on the line, along with thousands of other industrial jobs when the tax break was extended to other firms, lawmakers bought the spin that this was “a jobs package, not a Raytheon package.’’ Within five months of getting what it wanted, Raytheon offered buyouts to 4,400 workers. Two years later, the company had reduced its Massachusetts headcount by 4,100 people. Since the 1995 law said the company had to sustain its dollar payroll, not its headcount, Raytheon was free to lay off lower-paid production workers and replace them with higher-paid, white-collar workers.
Tax cuts for other companies followed, most notably, for Fidelity Investments, which waited for a job requirements clause in the law to expire before it shifted its workforce outside Massachusetts. Meanwhile, movie producers who film in Massachusetts are getting lucrative tax credits. In return, they provide jobs for a few scant weeks and most of the salaries they pay go to movie stars who live in California or elsewhere.
In 2011 those tax breaks for Fidelity Investments, a company who eventually moved some jobs out of Massachusetts, came under heavy scrutiny. Again, from the Globe:
State Senator Mark Montigny, chairman of the Post Audit and Oversight Committee, noted that the state government has created various tax incentives for one sector after another over the years, ranging from filmmakers to biotech companies to green energy firms. But Montigny said there has been too little follow-up reporting on how much money the companies received and whether they produced the amount of jobs expected.
“It almost seems like the flavor of the month,’’ said Montigny, a New Bedford Democrat. “The one thing that happens is that these tax breaks continue, and in fact accumulate.’’
The Massachusetts Department of Revenue annually produces a “Tax Expenditure Budget” that details these items annually. How do they define “tax expenditures”? From the FY 2013 “Tax Expenditure Budget’ from D.O.R.
Tax expenditures are provisions in the tax code, such as exclusions, deductions, credits, and deferrals, which are designed to encourage certain kinds of activities or to aid taxpayers in special circumstances. When such provisions are enacted into the tax code, they reduce the amount of tax revenues that may be collected. Massachusetts General Laws (MGL), Ch 29, Sec 1 defines tax expenditures as “State tax revenue foregone as a direct result of the provisions of any general or special law which allows exemptions, exclusions, deductions from, or credits against, the taxes imposed on income, corporations, and sales.”
With heightened scrutiny on these items, and with a broad definition of them that includes personal income tax exemptions, as well as sales tax exemptions on top of the corporate breaks given, the Massachusetts Taxpayers Foundation, headed by Michael Widmer, has issued a new report on tax expenditures in Massachusetts. What is in the Foundation report? A very interesting read.
The Foundation lays out, rather extensively, the current numbers for personal income tax, sales tax, and corporate exemptions, and makes a compelling case on the personal and sales tax side that the numbers are not as great as they appear. Under current definition all exemptions together total over $26 billion, but that definition includes the exemption from the sales tax of food and medicine, the exemption from sales tax of real property transactions, and on the personal side the exemption given to pension plan and health care contributions. The essential argument made by the Foundation is that while the numbers appear great there is a lot less to capture than it would initially appear. The argument is buttressed by the fact that the very definition of “tax expenditure” has been modified by the Legislature, and the Foundation paper gives their estimate of what that modification will bring. (Cuts the “tax expenditure” number in half.) As usual it is an outstanding job by the Widmer team at the Foundation on the numbers.
The paper is a must read for those looking to understand Massachusetts tax exemptions on the sales and personal tax side. The real areas of discussion (and controversy) however have taken place on the corporate side of the tax ledger. The Foundation shows annual corporate tax expenditures of $1.3 billion, which is about 10% of the overall total of $13 billion (new formula number). The paper makes the case that about $595 million of that total comes from tax code issues, (accelerated depreciation, apportionment of taxable income for multi-jurisdiction corporations, and loss carry-forwards). They make a compelling case on these three items, but I am not sure yet I agree that accelerated depreciation schedules are a “standard” item. (worth $242 million). “Apportionment” is a complex subject, but I think there are some that would make the case that some additional scrutiny could come on that issue.
The paper zeroes in the remaining corporate tax expenditures after removing the three mentioned above, and shows that number at $416 million.
Research Credit $110.9 million
Film Credit $82.6 million
Investment $56.5 million
All Others$166.1 million
Among these the Film Credit is the only one criticized in the paper. It is a strong candidate, based on merit, for elimination. Whether politics lines up with merit is quite another thing. The research credit, and the investment credit, are dealt with without going too far into the relative merits. The “other” category is simply glossed over, with reference to the 8 credits that comprise this category. Here is the report description of “other”.
Eight other credits comprise $166 million in tax expenditures, ranging from $47.5 million for the historic building tax credit to $500,000 for the conservation land tax credit. For the brownfield, economic development,historic rehabilitation, and low income housing credits, if the property is no longer used for the purpose the credit was intended, the state may require the company to repay its credits. Similarly, for the life sciences incentives, if a corporation’s job targets are not substantially met, a portion or all of the credit must be repaid to the state.
The Foundation mentions in the report that “static scoring” is used on corporate tax expenditures, and that the dynamic impacts of potential job creation and economic activity created by some of the corporate tax breaks are not factored in to the DOR “tax expenditure” scorecard. But I would guess that such a look will be a part of any legislative review of some of these items. It certainly should have been a part of any consideration of the changes when they were made. I think that any further review at the legislative level will include potential sunsets to corporate breaks, as well as a harder look at the dynamic impacts mentioned, and whether they justify the “costs” of the breaks. The Foundation, as mentioned, looked at that type of analysis only for the film tax credit, and showed a hugely inefficient allocation of Massachusetts tax resources. It would be great to see additional data on the corporate side to justify (or not) the other tax breaks mentioned. The Massachusetts Taxpayers Foundation does superb work, and they have great credibility on tax and fiscal issues. As Massachusetts begins to examine the potential for tax increases you can bet some of these corporate tax expenditures will be in the legislative cross hairs. And that cost-benefit analysis will be a key to whether some of them survive.