Romney rethinking new powers for tax aide

Governor Mitt Romney backed away yesterday from his proposal to give the state's top revenue official new discretion to pursue corporations that lower their tax bills by transferring profits outside Massachusetts, as national antitax groups chastised the governor for his broader, three-year quest to close what he calls tax loopholes benefiting corporations.

Romney, a former corporate executive who promised to pursue business-friendly policies to create jobs, has angered many Massachusetts business leaders by acting aggressively to wring more taxes out of corporations. The governor's zeal has also attracted the attention of tax watchdogs in Washington, a potential problem for Romney if he runs for president in 2008 and has to convince GOP primary voters that he is a fiscal conservative despite his Massachusetts pedigree.

Along with closing more tax loopholes, Romney earlier this year proposed giving Revenue Commissioner Alan LeBovidge and his successors additional power to adjust corporate tax returns. LeBovidge would have the authority to adjust tax returns when he detects corporations using paper transactions between related companies to lower their tax bills by transferring profits outside Massachusetts.

The administration estimated that the provision giving LeBovidge more discretion would bring in $50 million annually, but business leaders say the figure could be much higher. It is part of a package of several dozen proposed changes Romney recently sent to the Legislature, the third bill the Republican governor has put forward in the past three years targeting what he calls tax loopholes. The tax changes in the 2003 and 2004 packages bring in an extra $210 million per year, and the latest package would bring in an additional $170 million.

Overall, the administration argues that its tax changes are necessary to counter the creativity of high-priced accountants that companies employ to shrink their tax bills. But after hearing complaints from business leaders, the administration is reconsidering the provision that would give the revenue commissioner more power.

''We've listened to a number of business leaders who have expressed concern with these two sections of the bill," Romney spokeswoman Shawn Feddeman said yesterday. ''Our intent was not to expand the commissioner's discretionary authority. We're looking at these two sections to see whether we need to modify them."

Meanwhile, tax watchdogs in Washington are stepping up their criticism of Romney's approach to corporate taxes.

Grover Norquist, the politically influential head of Americans for Tax Reform, said in a telephone interview yesterday that ''the way to make Massachusetts job-friendly is not to impose stupid tax laws in a Draconian way."

Norquist praised Romney for trying to cut personal income taxes, but he said the governor should concentrate on lowering the state's corporate income tax rate of 9.5 percent, not ''trying to enforce unenforceable tax rates."

''With a rate that high, of course everyone is going to work on not being in Massachusetts," Norquist said. ''One way is to move to South Carolina; the other is to recognize profits in other states."

Romney's efforts to bolster corporate tax collections are also drawing criticism from the Council on State Taxation, a Washington-based group that sent a newsletter to its 4,000 members chiding the ''allegedly pro-business Republican" for seeking to reverse the Bay State's tax-cutting policies of the 1990s. The council said Romney's administration ''seems determined to undo this good work and firmly reclaim for the Commonwealth the dubious title of Taxachusetts."

The state was faced with a fiscal crisis when Romney took office in January 2003, after a campaign in which he had pledged not to raise taxes. The new governor asked LeBovidge to scour the corporate tax code for possible adjustments to bring in more money. LeBovidge, who helped companies exploit tax loopholes in three decades at what is now PricewaterhouseCoopers, has delivered.

Two years ago, Romney pushed through a half-dozen changes in the tax code that gave the state a one-time windfall of $135 million and still bring in an additional $120 million per year. Among them is a change preventing corporations from diverting income to low- or no-tax jurisdictions such as Delaware on transactions involving intangibles such as trade names or trademarks. Another change prevents larger businesses from avoiding taxes through paper restructuring that organizes them into several smaller businesses.

Last year, Romney and the Legislature approved another $90 million in changes. Those included levying higher taxes on securities corporations that were paying a lower state tax rate than other businesses; applying sales taxes to goods that are used in Massachusetts but were escaping taxation because they were purchased and then modified out of state before being brought here; and preventing department stores and other publishers of huge catalogs from getting a sales-tax break on printing costs.

This year's $170 million package includes proposals to levy sales taxes on software that is purchased on the Internet instead of bought on a computer disk; to require affiliated corporations to file as one entity if they engage in transactions designed to shield their Massachusetts income; and to extend the state's real estate transfer tax so it covers the sale of controlling interests in legal entities that own Massachusetts real estate.

Corporations will pay the state roughly $1.7 billion in income and excise taxes and about $1 billion in sales taxes this year. They also pay local property taxes.

For the most part, the Legislature, dominated by Democrats, has enthusiastically endorsed Romney's loophole closings. Representative Paul C. Casey, the Winchester Democrat who cochaired the Legislature's Taxation Committee for the past four years, recently described LeBovidge as ''very, very clever" and said the state would not have been able to balance its last few budgets without him.

Senator Cynthia S. Creem, Casey's Senate counterpart, also complimented LeBovidge, but the Newton Democrat said the administration is being disingenuous when it denies it is raising taxes on corporations.

''We are raising taxes," Creem said yesterday. ''I'm not saying it's wrong that we've done it, but I think we have to face up to that fact."

The state's leading business groups certainly agree with Creem's assessment that Romney's loophole closings amount to tax hikes. Eileen McAnneny of Associated Industries of Massachusetts has criticized all three Romney packages, but she said the proposal to give LeBovidge more discretion sparked particular concern among her group's 7,600 members, mostly because it appears to give the commissioner unfettered power.

''If the department felt that for some reason the tax you paid wasn't adequate, they could adjust it," McAnneny said. ''It's hard to operate in that environment."

Chris Anderson, president of the Massachusetts High Technology Council, said businesses need tax policies that are ''predictable and stable" and should not be subject to different interpretations by different revenue officials.

''When you create more discretion in an office that can be held by different types of individuals, it makes it hard to rely on somebody's tax policy," Anderson said.

But LeBovidge said that giving the commissioner some discretion is preferable to putting in place stricter rules that might prevent legitimate transactions, as well as illegitimate ones. He has said that 109,000 of the 146,000 corporations that do business in Massachusetts are so adept at avoiding taxes that they pay the state's alternative minimum tax, a mere $456.

''There are companies out there that are being very aggressive in their tax planning on paper transactions, and they're the ones we're trying to stop," LeBovidge said.