Changes would help stem the rising tide of outmigration
BOSTON – Research indicates that tax policy plays a key role in outmigration from Massachusetts, and a new study published by Pioneer Institute highlights six tax reforms that would help the Commonwealth address its outmigration and competitiveness challenges.
“Massachusetts is bleeding capital and talent while competitor states are adding hundreds of thousands of private sector jobs,” said Jim Stergios Executive Director of Pioneer Institute. “Every month we delay reform, the gap widens—and the Commonwealth risks locking itself into long-term decline.”
“Now more than ever, small businesses are operating in a hyper-competitive environment,” said Steve Clark of the Massachusetts Restaurant Association. “Every policy decision impacts profitability and growth potential. We need tax policy that encourages growth and signals to the rest of the country that Massachusetts is open for business.”
The reforms proposed by authors Andrew Mikula and Daniel P. Ryan in “The Case for Competitiveness: A Menu of Pro-Growth Changes to Massachusetts Corporate Tax Policy” are:
Estate Tax
Massachusetts is one of only 12 states that imposes an estate tax, and it kicks in at $2 million, a lower threshold than any states other than Oregon and Rhode Island. The estate tax greatly impacts the residency decisions of wealthy taxpayers and small business owners who plan to sell their businesses. The Commonwealth should join 38 other states by repealing the tax.
Throwback Rule
Corporations that conduct business in multiple states apportion income among those states for tax purposes. Yet income earned in some states may not be taxable there.
Instead of continuing as one of 19 states plus the District of Columbia that employ the “throwback rule,” which allows the Commonwealth to tax such “nowhere income” for corporations domiciled here, we should adopt the “throw-out” rule, thus limiting the sales factor to taxable transactions.
Sting Tax
Small businesses that are S corporations are taxed at the individual income tax rate of 5 percent rather than the 8 percent corporate rate. But the “sting tax,” unique to Massachusetts, adds a 3 percent surtax for S corporations with at least $9 million in annual receipts and a 2 percent surtax for S corporations earning between $6 million and $9 million. These thresholds haven’t been updated since 2008, so the tax ensnares entities that weren’t intended to be subject to it. The thresholds should be increased by 50 percent and benchmarked to inflation going forward.
Rolling Stock
Massachusetts is one of only 14 states that don’t exempt rolling stock – trucks, trailers and related equipment used in interstate commerce – from sales and use taxes, and the only Northeastern state except Vermont that doesn’t have the exemption. Adopting the rolling stock exemption would help businesses that transport goods to other states and receive deliveries from suppliers.
Minimum Corporate Excise
Massachusetts levies a $456 annual minimum tax even on corporations that have no income, which is the highest among several competitor states. Massachusetts should join the key competitor states that have no minimum corporate tax.
Non-income Measure of the Corporate Tax
In addition to the 8 percent tax on a corporation’s income, Massachusetts levies a non-income tax on a company’s net worth if it is an intangible corporation and on the value of its tangible property located in Massachusetts if it is a tangible property corporation. Once Louisiana phases out its capital stock tax next year, Massachusetts will tax intangible corporate assets at the highest rate of any state. The Commonwealth should enhance its competitiveness and join the vast majority of other states by eliminating this tax, which hits even corporations that are not profitable.
“The tax reform package adopted in 2023 did too little to move the needle for smaller businesses,” said state director of the National Federation of Independent Businesses Chris Carlozzi. “The proposals presented in this paper – like raising the sting tax threshold, repealing the minimum corporate tax, and exempting rolling stock from the sales tax – would make a difference for our members.”
Since obtaining some important microdata was infeasible at the time when this paper was being prepared, the authors propose these changes with the caveat that their impact should be subject to a more thorough cost-benefit analysis prior to their enactment. Pioneer Institute is calling on the Massachusetts Department of Revenue to evaluate the impact of these proposals on both the state budget and the broader economy.
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Daniel P. Ryan is a partner of Sullivan & Worcester LLP in Boston. He focuses on the representation of taxpayers in federal and state tax litigation and controversies, as well as in transactional planning involving corporate, franchise, personal income, and sales and use tax issues. Previously, he was with the Internal Revenue Service Office of Chief Counsel and served as a Special Assistant United States Attorney at the U.S. Attorney’s Office for the District of Massachusetts. He is a member of the American and Boston Bar Associations. Mr. Ryan is a graduate of Boston University School of Law, Catholic University of America Columbus School of Law, and Boston College.
Andrew Mikula is a Senior Fellow in Housing at Pioneer Institute. Beyond housing, Andrew’s research areas of interest include urban planning, economic development, and regulatory reform. He holds a Master’s Degree in Urban Planning from the Harvard Graduate School of Design.
About Pioneer Institute
Pioneer empowers Americans with choices and opportunities to live freely and thrive. Working with state policymakers, we use expert research, educational initiatives, legal action and coalition-building to advance human potential in four critical areas: K-12 Education, Health, Economic Opportunity, and American Civic Values.
