Governor Deval Patrick will propose a gradual reduction in the state's corporate tax rate from 9.5 percent to 8.3 percent when he unveils his budget next week, a bid to win business support and jumpstart his stalled plan to tighten what he calls corporate tax loopholes, administration sources said.
The plan is an olive branch of sorts that Patrick is hoping will help revive a cornerstone of his legislative agenda that has failed to move in the face of strong opposition from the business community and House Speaker Salvatore F. DiMasi.
In a further bid to win corporate support, Patrick may also propose a freeze on an increase in unemployment insurance rates that is due to take effect in March, the sources said.
Patrick will unveil the budget provisions this morning at a Neponset Valley Chamber of Commerce breakfast.
The compromise may not be enough to win over business leaders. While the corporate tax codes would be tightened in January 2009, Patrick wants to delay his corporate tax rate reduction until 2010, and it would be phased in over three years.
Closing what the governor describes as loopholes would generate $297 million in the next fiscal year and $490 million a year after that.
But that would be offset by about $210 million a year in lost revenue, once the tax rate reductions for businesses took full effect. The net increase in new taxes for the state would be $280 million.
Some Patrick allies in the Legislature applauded the move. But other lawmakers have urged deeper corporate rate cuts, to as low as 5.3 percent, the same as the state's personal income tax.
One business leader said Patrick's plan does not offer enough relief.
"This isn't any meaningful reduction," Paul Guzzi, president of the Greater Boston Chamber of Commerce, said yesterday. "We need to do things that are pro-competitive. In our view, this package doesn't fall under that category."
For years, governors in Massachusetts have sought to tighten corporate tax rules as a way of providing a financial boost to the state during tough financial times.
During his first year in office in 2007, Patrick tried to generate new revenue of $500 million per year by preventing corporations from declaring some profits in other states and by making sure that companies used the same filing status on both state and federal tax forms.
The plan was hotly opposed by the business community, and DiMasi and other lawmakers also objected, contending that it would send the wrong message about the determination by political leaders in Massachusetts, which has the fourth highest corporate tax rate in the country, to become more business friendly.
Patrick and legislative leaders formed a special tax study commission that last month urged that the tax law be made more restrictive, but only if corporate taxes are reduced.
Several legislators and business leaders said yesterday that the size of Patrick's proposed corporate tax changes make the proposal unpalatable.
"That is not a substantial reduction," said Representative John Binienda, House chairman of the Joint Committee on Revenue. "As I've often said, you're better off to build jobs, build economic development than to try, and chop it off to the knees."
DiMasi declined to comment last night.
Administration officials also say they are considering freezing the state's unemployment insurance rates, a maneuver that would not affect the state budget but would save businesses about $150 million annually. It is also likely to anger labor unions, who have fought for an increase that is scheduled to take effect in March.
Revenues from tax code tightening in the first year would be about $297 million, short of the $490 million a year, because it would take effect halfway through the fiscal year, on Jan. 1, 2009, according to administration officials.
Patrick officials said the money would not be earmarked for any spending items, but would be used to help offset a $1.3 billion gap in his upcoming budget proposal, which totals about $28 billion.
The Globe has previously reported that Patrick is planning to increase health insurance premiums for state employees and implement changes in Medicaid that would save more than $200 million. But he is also planning to increase spending on education by $368 million.
He is still weighing whether to include in his budget proposals up to $800 million in projected casino licensing revenue.
Closing the loopholes would target the largest businesses, say administration officials, who estimate that 2,000 to 3,000 businesses would pay more in taxes as a result.
The corporate tax rate reductions would be phased in over the next four years: In 2010, they would pay 9.1 percent; in 2011, they would pay 8.7 percent; and in 2012 they would pay 8.3 percent. Each year the tax rate is reduced, businesses would save another $70 million for each incremental decline, and between 15,000 and 20,000 businesses would see a reduction, the administration estimates.
Some applauded the governor's proposal. "We are in a year where it's clear there's no easy way to solve the budget crisis," said Noah Berger, executive director of the Massachusetts Budget and Policy Center. "And the idea that we continue to leave open half a billion dollars in corporate loopholes when there's a danger of cutting education or local aid or healthcare is increasingly difficult to defend."
"There's a lot of support," said Representative James Eldridge, Democrat of Acton. "It's an election year, and there's a fair amount of legislators that will support [closing] the loopholes as a way of raising revenues."
Matt Viser can be reached at email@example.com.