Tax bill would hit big firms the most

Smaller businesses in Massachusetts would pay lower taxes, but large out-of-state companies with operations in the Bay State would pay more under changes to the state's tax code moving through Beacon Hill, revenue specialists said.

The House of Representatives last week approved Governor Deval Patrick's proposal to change the way Massachusetts calculates businesses tax liabilities, particularly for those companies that have operations in multiple locations.

Currently corporations pay taxes only on the income earned by their Massachusetts units. This method has spawned an industry of tax schemes for companies to minimize liabilities by dividing profits and losses strategically among various units.

The new mechanism would use what's known as "combined reporting," in which a company's profits are taxed according to a formula that considers its sales, payroll, and capital assets in the state.

Twenty-one states have adopted a form of combined reporting to deter tax avoidance among companies. The Massachusetts proposal now goes before the state Senate. A spokesman for Senate President Therese Murray said she hasn't yet disclosed a proposal on corporate taxes.

The Patrick administration estimates a change to combined reporting would raise an additional $188 million in revenue next year.

But opponents said that with the economy slowing, now is a bad time for any tax increase on large companies that sustain huge numbers of jobs.

"I can't define an exact group who will be impacted, but what I do know is the weight of this will fall most heavily on large, multistate corporations that employ hundreds of thousands of Massachusetts citizens," said Michael Widmer, president of the Massachusetts Taxpayers Foundation, a nonprofit business advocacy group.

Another business leader, Alan G. Macdonald of the Massachusetts Business Roundtable, cited Procter & Gamble, the Ohio consumer products giant that bought Gillette Co. in 2005, as the type of company that would face a much higher tax bill on, for example, assets such as its razor-making plant in South Boston.

A P&G spokeswoman said the company wouldn't talk about specific tax payments but said the company supports the positions of groups, including the Greater Boston Chamber of Commerce, which have called for lower Massachusetts corporate tax rates.

Meanwhile, the new method could result in lower taxes for small-to-midsize companies that have most or all of their operations here in Massachusetts.

"More often than not, the companies based here who have no operations outside the state are the winners," said Tarra Curran, principal of Tofias PC, an accounting and tax firm in Cambridge.

For example, she said a local company with several hundred million dollars in revenue that currently pays millions in taxes may see its annual tax bill reduced around one hundred thousand dollars or more.

Macdonald added that only a few small companies in his membership said they would benefit from the tax change. Chiefly the executives in his group are worried the new measure will make their tax returns more complicated. "They're split, but mostly they're not happy because of the extra level of complexity" and more payments, he said.

To minimize what would be a large tax increase, the legislation would lower the overall tax rate charged to corporations from the current 9.5 percent. The measure passed by the House, for example, would reduce rates to as low as 7.5 percent by 2011 depending on revenue growth.

The Taxpayers Foundation had previously said it would support combined reporting only if it were tied to reductions in the corporate tax rate to make the legislation revenue neutral, probably to around 7 percent. But the original version pushed by the governor, and the one passed by the House, have rates that aren't low enough to offset the higher collections companies would have to pay.

Ross Kerber can be reached at kerber@globe.com.