Tax Policy – Massachusetts House Proposes Doubling Down on Worst Features of State Corporate Excise Tax to Fund Transportation

Massachusetts’ House of Representatives has proposed a transportation funding bill to be paid for, in part, by an unusual transportation revenue source—a greatly expanded corporate minimum tax. The transportation funding proposal, contained in H. 4508, would raise approximately $612 million per year with a 5-cent increase in the gas tax and 9-cent increase in the diesel fuel tax, increased fees for ride-hailing services like Uber and Lyft, and a corporate minimum tax hike, among other tax increases.

The best transportation funding sources abide by the benefit principle of taxation by generating revenue based on use of the roads or transit system. Gas taxes, tolls, train fees, and even some fees on ride sharing are generally in line with this concept. A corporate minimum tax does not make sense as a source for transportation funding because it has little to no direct connection to the benefit principle of transportation funding, and it would double down on the worst features of Massachusetts’ already uncompetitive corporate excise tax.

Corporate entities can be boiled down to the legal documents that govern their incorporation. Thus, they should be thought of as entities that collect and remit taxes that are paid by people—namely, the corporation’s employees, shareholders, and customers. To the extent that corporate employees, shareholders, and customers consume gas, use toll roads, buy train tickets, or take rides in Uber or Lyft, they are already paying for the transportation system. Thus, it is unusual to place an additional tax levy to fund transportation on corporate entities, which will simply collect more indirect taxes from the same people (their employees, shareholders, and customers) with no accounting for whether those people are even using the state-funded transportation infrastructure and if so, how much.

For starters, Massachusetts’ corporate excise tax already generates a lot of revenue—taking in $349 per Massachusetts resident in fiscal year 2018, second behind only New Hampshire ($582) for highest corporate collections per capita and compared to a nationwide average of $147 per capita. The corporate minimum tax proposal is estimated to bring in an additional $100 million-$150 million, which would bump up Massachusetts collections by $15-$22 per capita.

Table 1. State Corporate Income Tax Collections per Capita

Sources: U.S. Census Bureau, “Annual Survey of State and Local Government Finances”; Tax Foundation calculations.

State Fiscal Year 2018
New Hampshire $582
Massachusetts $349
California $316
Alaska $266
Delaware $263

Massachusetts ranks fifth-highest among states for corporate collections as a portion of total state and local taxes, with 4.9 percent of state and local tax revenues coming from the corporate excise tax. Of those states ahead of Massachusetts, New Hampshire has no sales tax and no wage income tax, Tennessee has no wage income tax, and Delaware has no sales tax. Thus, those states disproportionately rely on the remaining taxes that they do levy, while Massachusetts retains all the taxes those states exempt and yet still relies heavily on corporate taxation.

Table 2. Corporate Tax Collections as a Portion of Total State and Local Tax Revenues

Sources: U.S. Census Bureau, “Annual Survey of State and Local Government Finances”; Tax Foundation calculations.

State Property General Sales Individual Income Corporate Income Other Taxes
New Hampshire 67.60% 0.00% 1.00% 8.70% 22.80%
Tennessee 25.70% 40.90% 1.10% 7.60% 24.70%
New York 32.00% 17.10% 31.70% 6.00% 13.20%
Delaware 18.90% 0.00% 26.50% 5.40% 49.20%
Massachusetts 37.10% 13.90% 32.70% 4.90% 11.50%

On the other hand, only 31.2 percent of Massachusetts transportation funding comes from gas and license taxes, giving Massachusetts the 13th-lowest proportion of transportation funding that comes from this transportation user-fee source.

Furthermore, the push to expand Massachusetts’ corporate minimum tax doubles down on the worst features of the Commonwealth’s already uncompetitive corporate excise tax, which registers as the 39th best-structured corporate tax in Tax Foundation’s 2020 State Business Tax Climate Index. Massachusetts’ corporate excise tax can be thought of as four different components combined:

  • An 8 percent corporate income tax,
  • A “stinger” surcharge tax on pass-through S corporations that ranges from 0 to 3.9 percent of income (on top of the state individual income tax which is paid by S corp owners),
  • A net worth or capital stock tax that is $2.60 per $1,000 of net worth in Massachusetts, or
  • A $456 corporate minimum tax if $456 is greater than the corporation’s liability based on income and net worth.

Of the four components of Massachusetts’ corporate excise tax, only the first component (an 8 percent corporate income tax) is common in other states. Massachusetts is the only state to levy a stinger surcharge on S corporations (in particular, one with rates based on receipts levels rather than income levels), is one of 16 states to levy a capital stock tax (four of these 16 states are currently phasing theirs out), and would be the sixth state to have a bona fide corporate minimum tax after Alaska, Florida, Iowa and Maine all repealed their corporate minimum taxes as a part of federal conformity legislation. Thus, part of the reason Massachusetts already has large corporate collections is because it has three components to its corporate tax that are anachronistic, non-neutral, and uncompetitive, which most other states forgo.

The new corporate minimum tax proposal would give Massachusetts a bona fide and burdensome corporate minimum tax, and one that is unlike the corporate minimum tax that is levied in any of the five states that still have one. Massachusetts’ proposal would levy the tax based upon total in-state sales rather than income or some other “ability to pay” measure. A company would be liable for one of nine different corporate minimum tax levels, depending on their total receipts from business within Massachusetts.

Table 3. Receipt Levels and Associated Tax Liability

Source: Language from H. 4508 bill.

Total Massachusetts sales Corporate minimum tax under H. 4508
<$1,000,000 $456
$1,000,000 to $5,000,000 $1,500
$5,000,000 to $10,000,000 $2,500
$10,000,000 to $25,000,000 $3,500
$25,000,000 to $50,000,000 $5,000
$50,000,000 to $100,000,000 $10,000
$100,000,000 to $500,000,000 $25,000
$500,000,000 to $1,000,000,000 $75,000
$1,000,000,000 < $150,000

Measuring any tax, even a corporate minimum tax, based purely on receipts rather than income is highly non-neutral and discriminates against high-volume, low-margin businesses like retailers, along with businesses that break even or experience annual losses. This concept would double-down on a similarly unusual provision in how Massachusetts levies its current “stinger” surcharge on S corporations. Massachusetts makes the S corp income tax rate dependent on a business’ total receipts, which results in the perverse effect of creating a greater tax liability for some low-margin Massachusetts companies than what is paid by more profitable, higher-margin Massachusetts companies.

The House’s corporate minimum tax proposal will create the same perverse effect, only worse. Some Massachusetts companies with low profit margins, no profits at all, and significant annual losses will face a significant tax increase.

Massachusetts should not expand its non-neutral, uncompetitive, and anachronistic corporate minimum tax to fund transportation. It makes little sense for money-losing Massachusetts businesses to be hit with a higher tax bill to pay for transportation updates. Ultimately the employees, shareholders, and customers of these Massachusetts corporations will indirectly bear the burden of the corporate minimum tax, and that burden will be distributed not based on ability to pay or use of the Commonwealth’s transportation system, but rather, arbitrarily based on one’s connection with a Massachusetts corporation that has high revenues, little to no profit, and relatively low net worth held in the Commonwealth. Lawmakers should remove the corporate minimum tax from the transportation funding package and focus transportation funding on tax sources that are reasonably connected to transportation infrastructure use.

Source: Tax Policy – Massachusetts House Proposes Doubling Down on Worst Features of State Corporate Excise Tax to Fund Transportation