While the state's corporate tax rate will go down next year, a spike in unemployment insurance could offset potential savings.
By KYLE CHENEY
BOSTON - Massachusetts business owners will wake up on Jan. 1 to some welcome tax relief, but a looming spike in the unemployment insurance tax could offset potential savings, and state officials are offering no commitments about whether they’ll stave off the increase.
Patrick administration officials on Thursday hailed the imminent reduction in the state’s corporate tax rate from 8.25 percent to 8 percent – the last in a three-step lowering of the rate from 9.5 percent that began in 2008. Gov. Deval L. Patrick signed the reduction into law that year as part of a package of tax code changes aimed at bringing additional revenue to the state from companies with a Massachusetts presence.
Gregory Bialecki
In a telephone interview, the governor’s top economic development adviser said businesses would collectively save about $15 million in 2012 as a result of the corporate tax reduction.
“The more important part of the story is that the governor and the Legislature worked together and they stuck with it, and over three years, we reduced the rate by a point and a half,” said Gregory Bialecki, secretary of housing and economic development.
“Because we phased it in over three years … we were able to achieve in three years a significant reduction but at the same time in a financially responsible way," he said. "When we talk with some folks who are advocates of tax cuts, there is not enough attention paid to how are we going to handle the loss of revenue that that results in.”
Bialecki said the reduction to 8 percent puts the state “in the middle of the pack” compared with other states, a distinction he said could improve Massachusetts’ reputation as a business-friendly state. He noted, however, that high energy and health care costs continue to be an impediment for businesses and said that the Patrick administration intends to pursue solutions next year.
“Health care and energy costs are and continue to be a differentiating factor,” he said. “Our goal will be, again, to get out of the top 10 in costs.”
House Minority Leader Bradley Jones found irony in the administration’s celebration of the corporate tax reduction he said the governor only embraced after it became clear lawmakers wouldn’t support his effort to increase taxes on businesses in 2007.
“They’re practicing a little bit of revisionist history,” Jones said. “The only reason that they took the tax cut was because that was the only way the bill was going to get done. That won’t be the story he tells.”
Although employers welcomed the reduction in the tax rate, they’re also poised to see an increase of up to 40 percent in the taxes they pay into the state’s unemployment insurance trust fund, which supports benefits for unemployed workers.
Contributions from businesses are scheduled to climb hundreds of dollars per employee unless lawmakers and the governor act to prevent the spike, as they did earlier this year, citing potential harm to job growth.
In February, the governor signed a bill that limited the unemployment insurance increase to $61 per employee, rather than a $228-per-employee spike that had been slated to take effect in the first quarter of 2011. It was the third straight year that Patrick and the Legislature moved to freeze the unemployment insurance tax rate.
Bialecki offered no assurance that the governor would take the same step this year, noting that the administration hopes to rebuild an unemployment insurance trust fund that has been depleted during the economic downturn.
“We’re looking at the numbers. Our instinct would be, we’d obviously prefer a freeze in the rates,” he said. “That’s something we’re looking at whether we can do. It’s really a bit of a math question. Because of the recession, there’s been a tremendous drain on the unemployment fund in Massachusetts … Now that the economy is recovering, we do need that trust fund balance to start to grow again.”
Bialecki said that if the current unemployment insurance rate could begin to rebuild the trust fund, the administration would look closely at slowing the increase in the tax. He noted that Massachusetts’s fund fared better than funds in some states that needed to borrow “literally billions of dollars” from the federal government to continue paying benefits.
Labor officials have traditionally opposed freezing the unemployment insurance rates, describing the tax on businesses as an important lifeline for residents without jobs and warning that the trust fund’s solvency is jeopardized when businesses request annual freezes. Officials with the Massachusetts AFL-CIO were not immediately available for comment, but in February the group’s president Robert Haynes – who has since stepped down from the post – ripped businesses for seeking a rate freeze, and lawmakers for listening to them.
“If our elected leaders were acting like good parents they would let the UI rate go up and make businesses finally learn their lessons about the pitfalls of their penchant for rate freezes,” Haynes said at the time. “The business community has made this particular bed and they should be made to lie in it. The size of the scheduled rate increase is so high because business blindly and automatically whined and begged for rate freezes in good times and were handed hundreds of millions and probably billions of dollars by the elected leaders who deliver ill-advised rate freezes year after year.”
But John Regan, executive vice president of Associated Industries of Massachusetts, reiterated a request Thursday for a four-year freeze in unemployment insurance rates, arguing that based on already-scheduled changes, it would bring in roughly the same level of taxes. Citing Division of Unemployment Assistance projections, Regan said the tax rate is scheduled to sharply increase next year and then gradually decrease as joblessness declines.
Allowing that initial spike in rates to occur, he said, could chill job growth.
“It definitely becomes a factor,” Regan said. “The non-wage related costs of business are a factor in deciding when to add people. When UI rates are high, that’s a headwind you have to deal with before you can add personnel.”
Regan said businesses haven’t openly clamored for an additional reduction in the corporate tax rate, but would like to see a friendlier posture from the state Department of Revenue, which he described as having “a well-earned reputation for being very aggressive, perhaps overly so.”
“There are times when DOR is exceedingly aggressive and not very customer friendly,” he said. “The rate in and of itself is irrelevant if the way you’re assessing income in Massachusetts is so aggressive that companies are turned off by that.”
A spokesman for the Department of Revenue noted that the agency’s new commissioner, Amy Pitter, has launched a discussion with stakeholders to “determine what works and what needs improvement.”
“The subject of dispute resolution is one of those areas up for discussions -- which have just begun -- so to speculate on what the end result will be at this point would be premature, but it is in the interests of both DOR and all taxpayers to reach settlements in tax cases as quickly as possible and in a way that protects both the interests of the Commonwealth and individual taxpayers and corporations,” said the spokesman, Robert Bliss.
The spokesman noted that legislation enacted earlier this year with the support of DOR and the governor reduced the interest rate on any audits that last longer than 18 months. The legislation also required DOR to post on its web site any tax policies issues under development.
Jones, the House minority leader, and his Senate counterpart, Sen. Bruce Tarr, R-Gloucester, said they intend to address the potential unemployment insurance spike in the New Year, and Tarr said he hopes to “enact reforms so that it doesn’t become a perennial event to freeze the rate schedule.”
Jones said even with a rate freeze next year, many companies will still likely pay a higher tax because they’re assessed based on the addition or subtraction of workers.