Tax whack-a-mole

WHEN LEADERS in the Massachusetts House recently agreed to Governor Patrick's plan to close certain corporate tax loopholes - partially offset by a cut in the overall corporate tax rate - it looked like the state was on its way to netting more than $200 million in badly needed new revenues.

But it turns out that it is no easy matter to codify the changes in a way that ensures predictability and transparency, and doesn't introduce new loopholes for corporations. It will be up to the state Senate to scrutinize carefully the House reform proposals to achieve these goals.

The state Department of Revenue has sounded a warning that some fine print in the House version of the corporate tax package could undercut the governor's effort to increase the yield from corporate taxes. The department points in particular to a provision that would allow corporations to avoid Massachusetts taxes by shifting income to overseas affiliates. The department points to a Wall Street Journal report on a move by Wal-Mart to set up a small real estate office in Italy, with responsibility for billions of dollars in US properties. The state of Illinois saw this as a means of dodging its taxes and is now in a legal fight with the giant retailer. According to one analysis, however, another law would protect Massachusetts from this specific maneuver.

The emergence of the offshore loophole is ironic because one of the principal loopholes both Patrick and the House want to close is one that allows corporations to avoid Massachusetts taxes by shifting profits to subsidiaries in other US states without corporate taxes. To end such abuse, more than 20 states have adopted a "combined reporting" system like the one proposed for Massachusetts. The state should not let itself get into a game of tax-dodge "whack-a-mole" with firms' tax-avoidance specialists.

According to the Department of Revenue, the experience of Minnesota, with a similar offshore exemption, suggests that Massachusetts could lose more than $100 million annually if it adopts the House provision. Another tax expert questions that figure, but House leaders could provide no estimate of how much money the clause would cost the state.

Business leaders say they are resigned to losing the loophole of interstate subsidiaries but want clarity and predictability in the corporate tax code. Judging from the Illinois/Wal-Mart wrangle, the one thing predictable about the introduction of a new offshore tax haven is a field day for lawyers. The Senate should make sure that its reform of corporate taxes actually increases total revenues and transparency.