Governor Deval Patrick's administration said yesterday the governor is willing to trim the state's corporate income tax rate from its current 9.5 percent, a bid to forge a compromise over his hotly contested proposal to tighten corporate tax codes.
It is a major concession to political realities for the governor. Patrick has made closing what he calls tax loopholes a major initiative of his administration, saying it could produce more than $400 million in new revenues for the state and make the tax codes fairer.
But Massachusetts business leaders and House Speaker Salvatore F. DiMasi have strongly opposed the move. They contend it would send a bad message about Massachusetts as a place to do business.
Now, Patrick's administration is saying that by reducing the rate by an unspecified amount, it could soften the blow of tightening regulations on businesses and make the changes more politically palat able, while still winning some new tax revenues.
The governor's willingness to reduce the tax rate was signaled in a draft report for a special corporate tax study commission that will be voting today on the final recommendations it will make to the Legislature.
The advisory commission has been closely divided all year on whether to stop corporations from avoiding certain Massachusetts taxes by recording profits in other states. Equally controversial has been a proposal to require companies to file state and federal taxes using the same corporate status.
Henry Dormitzer, the state's revenue commissioner, said in an interview yesterday that the governor does not want to lose the entire $400 million in new revenues that would result from tightening regulations.
Dormitzer did not give a target reduction, but said that reducing the tax rate by one percentage point, to 8.5 percent, would cut the impact of closing loopholes to about $200 million.
"After a year of working with the tax commission, it's come out that it is the right way to go," said Dormitzer. "There is plenty of room to lower the rate and still restore some fiscal stability."
How low the tax rate goes should be "part of a debate in the Legislature that the governor participates in," Dormitzer said. "The decision would balance the need for competitiveness with the need to fund everything we do in the state budget."
The Legislature would have to approve any recommendations before they became law. It was unclear last night whether the governor's willingness to compromise, a possibility he first broached in May, would kick-start his plan with the advisory commission or the Legislature.
According to a draft of the commission's final report prepared by the administration, there is broad support among commission members for cutting the tax rate from 9.5 percent. Commission members appointed by DiMasi are expected to oppose any tax rule tightening unless it is offset by a lower corporate tax rate.
DiMasi has said the tax code should be reviewed in its entirety, not piecemeal. The governor's plan, he has contends, overburdens businesses.
"He always says we need to make the tax code simpler, fairer, and more predictable," said DiMasi's spokesman David Guarino. "Businesses are looking at five- or 10-year business plans and if we keep changing the tax code on them they'll decide to grow jobs elsewhere."
Guarino said DiMasi would not comment on the commission's recommendations until they are issued today.
A motion to make the changes in the tax code "revenue neutral" will be offered today before the commission by one of its members, House minority leader Bradley H. Jones Jr.
"The governor's point may be to generate revenue, but that would be a terrible message to be sending to businesses," said Jones, who predicted the Legislature would not consider the package if it doesn't cut the corporate tax rate enough to cancel tax increases.
Michael J. Widmer, president of the Massachusetts Taxpayers Foundation and another DiMasi appointee on the commission, said he would back the governor's plan only if there were a major cut in the corporate tax rate to about 6.5 percent.
"Would I be open to some compromise?" said Widmer. "Absolutely. If it's significant reduction, yes. If it's a token reduction, no."
Patrick initially proposed closing seven loopholes when he unveiled his tax initiatives early this year, which he estimated would have raised $295 million next year and $500 million annually thereafter.
Dormitzer said revamping the corporate tax system to make it fairer would not hurt competitiveness.
Over the past five years, he noted, corporate profits have risen 158 percent, but business tax collections just 114 percent.
But in anticipation of today's vote, Associated Industries of Massachusetts yesterday released a study showing that the combined state and local tax bill of business has increased 45 percent, or $4.2 billion, over the last five years. Personal tax collections, meanwhile, grew 33 percent. The result: Business's share of the state and local tax burden rose to nearly 40 percent from just less than 38 percent in 2002.
The study "should help to clear up any questions as to whether business is paying its fair share," said AIM president Richard Lord in a statement. "Legislators should evaluate the overall system of state and local business taxation, and not focus on any one state and local tax in isolation."
AIM contends that the state's economy cannot afford higher taxes that would come by closing loopholes, noting that with some of the highest business costs in the nation, the state has had one of the lowest rates of job growth.
"Business pays a significant amount of taxes and that amount is on the rise," said Eileen McAnneny, an AIM senior vice president.
"We need to look at business tax code to simplify, modernize, and make it more globally competitive, and I don't think we've looked at it comprehensively enough," she said.
Massachusetts business taxes, however, are relatively modest compared with other states. In its most recent analysis of state business costs,
Frank Phillips of the Globe staff contributed to this report.
