Businesses blast governor's tax plan

Governor Deval L. Patrick is looking to companies to cough up nearly $800 million more in tax payments over the next two years, through what he calls "closing loopholes." But businesses call the seven proposed changes job-killing tax increases.

Dollar-wise, the biggest change by far would be a move to so-called combined reporting, a method of imposing state taxes on multistate corporations that California and 14 other states use.

Aides to Patrick expect such a system to bring in $136 million in new revenue during the year beginning July 1; based on 2004 tax returns, at least 2,300 of the 149,000 corporations that pay state taxes would be affected, according to a Revenue Department spokeswoman.

The only proposal Patrick floated yesterday that had not been previously reported involves hotel and motel taxes on rooms booked online. Many travel websites, including Priceline.com, Hotels.com, and airline-hotel booking sites, buy blocks of rooms at discounted wholesale rates, then mark them up for resale to consumers.

Patrick would force them to pay state and local hotel taxes on the retail room rate, not the wholesale, which the governor's budget aides contend would yield $5.6 million for the state next year and $4 million for local governments.

Patrick's predecessor, Republican Mitt Romney, attempted to make the same change during three rounds of corporate tax changes in his term, but backed off after Internet interests pummeled him with radio ads about an "Internet tourism tax."

Art Canter , president of the Massachusetts Lodging Association, said Romney and Patrick followed the lead of several other states, but "to date, nobody's been able to do it" because of the complexities of federal Internet taxation policy, as well as the political backlash.

"We have other ways for them to generate revenues without creating new taxes," Canter said, including imposing hotel taxes on companies that specialize in short-term "corporate rentals" of condos and on summer vacation-home rentals.

The five other changes Patrick said he will seek from the Legislature are:

Requiring that companies claiming a certain corporate structure when "checking the box" on federal tax returns file the same way in Massachusetts, and not claim a lower tax rate for being a "business trust" or other entity. That would generate $99 million in fiscal 2008, the administration said. About 3,566 Massachusetts businesses, based on 2004 tax returns, would be affected.

Making big companies that lease capital gear from subsidiary "captive leasing companies" pay sales tax, worth $28 million.

Mandating that insurance companies pay standard corporate tax rates, not lower insurance company rates, on noninsurance affiliates, worth $14 million.

Imposing a tax when businesses sell an ownership interest in an entity that owns buildings or land, not the actual underlying real estate, $12 million.

Reducing the "earned income credit" for low-wage workers who live in Massachusetts but work in another state, or work here and live in another state, $2 million.

Overall, the administration expects the changes to yield about $295 million the first fiscal year and $500 million the second year.

Patrick is looking to raise more revenue from businesses largely to close a $1 billion budget gap for this coming year, and to help fund a program unveiled yesterday to give state income tax credits to lower-income homeowners. The goal is to offset property taxes and water-sewer bills.

The governor, meeting with local officials and reporters in Somerville, said he has no plans to go after investment and research and development tax credits. "What we're talking about today is nothing like that. They're gaps, they're cracks in our tax code that clever accountants and clever tax lawyers use -- and I used to hire them when I was working in the corporate world -- to avoid paying their fair share," Patrick said.

Business interests vow to battle Patrick's plans in the Legislature, insisting they aren't loophole-closings but clear-cut tax increases.

John Regan, vice president at Associated Industries of Massachusetts, the state's biggest business lobby, said that combined with Romney's three waves of corporate tax changes, the Patrick moves mean "we're looking at $1 billion more in taxes levied on the business community. The impact of that on job-creation is going to be significant."

Regan said the measures also discourage businesses because they signal chronic uncertainty about state taxes. "It sends a message that our tax code is like the weather: Wait a year, and it changes," Regan said.

Patrick said he will convene a business-labor-academic task force to reevaluate the state's overall tax regime. But Paul Guzzi, Greater Boston Chamber of Commerce president, said, "Proposing tax-law changes before the tax commission is created is putting the cart before the horse."

The governor drew support, however, from Massachusetts AFL-CIO president Robert J. Haynes: "It is refreshing to have a governor who understands that we all have a role to play in supporting this Commonwealth, and that corporations have as much responsibility to pay for the essential government services they benefit from as individuals do.

"Our hard-working members and their families can't cherry-pick which taxes they want to pay or not pay, and corporations shouldn't be able to, either."

Peter J. Howe can be reached at howe@globe.com.