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Justice undeferred
The state is mired in fiscal crisis, but that doesn’t mean we should stop fighting for what’s right
BY KRISTEN LOMBARDI

UNKINDEST CUTS

LAST WEEK, in a January 29 televised address to Bay State residents, Governor Mitt Romney announced that his administration would make a series of spending cuts to close what he projected to be a $650 million budget gap in fiscal year 2003. The following day, Administration and Finance secretary Eric Kriss outlined the cuts, one-third of which slash direct local aid to the Commonwealth’s 351 cities and towns.

Romney officials have since been quick to sell these reductions in local aid for municipalities ― the deepest such cuts in the state’s history, totaling $114 million ― as an attempt to spread the pain of the current fiscal crisis around. To be sure, the administration is slashing local aid by a flat 9.35 percent for every community. But because the extent of each community’s reliance on such aid varies, so do the effects of the cuts. Those hit hardest turn out to be the larger, urban areas in Massachusetts, where poorer, more vulnerable populations reside. They also happen to represent areas where voters threw their support behind Romney’s challenger, Democratic gubernatorial candidate Shannon O’Brien, in the November 5 election.

Of course, no one believes that Romney targeted cities and towns that went against him in the elections when devising his budget cuts. But as it turns out, that’s the natural effect of an across-the-board whack at local aid. Even in these tight fiscal times, it seems, the governor has managed to shield his base ― wealthy, suburban independents ― from feeling the brunt of the budget ax. Consider the cities and towns where Romney performed best in November’s election, and how they’ve fared in the latest round of cuts, versus those where O’Brien outshone the governor.

Top 10 cities and towns that supported Romney

Town Amount of cut Percentage of fiscal year 2003 state aid

1) Andover $173,399 1.56 percent

2) Plymouth $360,754 1.24 percent

3) Chelmsford $582,479 3.71 percent

4) North Andover $193,208 1.98 percent

5) Barnstable $197,933 1.29 percent

6) Marshfield $223,897 1.38 percent

7) Shrewsbury $265,029 2.09 percent

8) Franklin $235,594 0.94 percent

9) Methuen $524,311 1.42 percent

10) Hingham $170,346 1.96 percent

TOTAL in cuts: $2.9 million, averaging 1.8 percent of FY ’03 state aid.

Top 10 cities and towns where Romney fared the worst:

Town Amount of cut Percentage of fiscal year 2003 state aid

1) Boston $24 million 4.29 percent

2) Cambridge $2.7 million 6.31 percent

3) New Bedford $2.3 million 1.82 percent

4) Fall River $2.4 million 1.99 percent

5) Somerville $3 million 4.83 percent

6) Springfield $3.4 million 1.26 percent

7) Brookline $756,647 3.82 percent

8) Newton $638,595 2.71 percent

9) Northampton $444,275 2.56 percent

10) Worcester $4.3 million 1.93 percent

TOTAL in cuts: $43.9 million, averaging 3.2 percent of the FY ’03 aid.

 

CHANGE DOESN’T happen overnight at the Massachusetts State House. Every two years, when a new legislative session begins, countless worthy bills are filed, only to languish in committee or get derailed into a study. It’s no surprise, then, that when progress is made, it comes at a snail’s pace. And things have even gotten slower in recent years. In 2001, for example, 6950 bills were filed. Lawmakers passed just 140 of them, or two percent. By contrast, of the 6097 measures filed in 1998, as many as 487 of them, or eight percent, became law. Legislation that deals with social issues — helping the poor, the disenfranchised, and those whose rights are subject to the whims of the majority — fares even worse. Under the leadership of House Speaker Tom Finneran, measures routinely passed by the Senate — the most high-profile being domestic-partnership legislation — die in the House of Representatives. It’s not a pretty legacy.

Now that the 2003-’04 legislative session has gotten under way, lawmakers will have to contend with the state’s ballooning budget crisis — an issue that’s sure to overshadow the approximately 6000 new pieces of legislation that have been filed. As any advocate for social justice knows, an unreceptive or even hostile atmosphere on Beacon Hill means a tough sell. But that’s no reason to avoid a fight. So with that in mind, here are five important measures that would move Massachusetts toward a more fair and equitable world.

Corporate taxes

Clearly, the question of how to deal with the state’s ever-escalating financial troubles — specifically, the projected $3 billion budget deficit in FY ’04 — will dominate the agenda this session. And to counter the widely anticipated spending cuts to government-funded services, progressive lawmakers are making it their top priority to push for 10 corporate-tax-related bills drafted by the Massachusetts Budget and Policy Center (MBPC), a liberal think tank in Boston. Generally speaking, these measures aim squarely at a root cause of the current fiscal crisis: dwindling corporate-tax revenues. According to a January 2003 MBPC report titled Gone with the Wind, the Massachusetts corporate-income tax (otherwise known as the corporate "excise" tax) has plummeted from 11.6 percent of the state’s total tax revenue in 1980, to 8.3 percent in 1990, to just four percent in 2002. In other words, it’s fallen by two-thirds in two decades. Compare last year’s corporate tax returns to those filed during past recessions and the vanishing revenue stream becomes more apparent. Corporate taxes, the report shows, generated $227 million less in 2002 than in 1991, after adjusting for inflation. Between 1982 and 2002, they yielded $356 million less.

This decline in corporate income stems, in large part, from the high-profile tax breaks the legislature passed during the flush years of the 1990s. In 1995, lawmakers granted phenomenal relief to Raytheon and Fidelity by changing their tax formulas. Rather than charging them like any other business — based on their Massachusetts sales, property, and payroll figures — legislators set up a special formula for manufacturing and mutual-fund companies, which now have to pay taxes only on sales. The tax break was supposed to give Raytheon and Fidelity a competitive edge and economic stability. But those hoped-for improvements haven’t come about. In Massachusetts, manufacturing jobs like those at Raytheon have disappeared at a rate three times faster than they have in the nation overall since 1995. And last year, Fidelity laid off 1695 employees — or 5.4 percent of its workforce. Eleven hundred of those jobs were in New England. The company also transferred employees who worked in downtown Boston to its facility in Smithfield, Rhode Island — a move that seems to violate the agreement made with the state in exchange for a tax break.

Meanwhile, the state lost a considerable amount of money because of these breaks. In 2002 alone, the Department of Revenue (DOR) estimated that the Raytheon and Fidelity relief cost as much as $200 million combined. To put it differently, those breaks have necessitated a third of the $650 million in spending cuts legislators are currently eyeing to bridge the budget gap this fiscal year. Says Jeff McLynch, of the MBPC, "Experience in the manufacturing sector has shown that these breaks haven’t done the job. Instead, they have been a great boon to these companies." Two of the 10 corporate-tax bills now before the legislature would repeal the formula lowering taxes on mutual-fund and manufacturing companies.

The decline in corporate-tax revenues also stems from accounting schemes used by big business to get around paying taxes. At least three of the MBPC bills are meant to close such accounting loopholes. Take, for instance, the measure that would ban what’s known as "passive-investment corporations," or PICs. The legislation would prohibit a Massachusetts-based corporation from setting up a subsidiary, or PIC, in no-tax jurisdictions like Delaware and the Cayman Islands — thereby shifting the corporation’s taxable profits out of state. Here’s how it works: a corporation establishes a PIC in a state that doesn’t tax corporate subsidiaries. The company, in turn, leases its "intangible products" — its name, its mascot — to the subsidiary. Back in Massachusetts, the company gets to deduct the royalty and leasing payments from its taxable income. According to its chief sponsor, State Representative Paul Demakis (D-Boston), the bill "is designed to eliminate a mechanism for shielding income from taxation" by denying corporations tax deductions for leasing or royalty payments.

A recent state Supreme Judicial Court decision involving the Sherwin-Williams paint company shows just how harmful the PIC phenomenon can be. In 1991, DOR tried to tax Sherwin-Williams for $47 million in royalty-payment deductions that the company took after setting up two Delaware-based PICs. The company appealed to the SJC, which ruled in favor of Sherwin-Williams in December 2002. The SJC, according to Demakis, noted that no state legislation prevents Sherwin-Williams and other companies from engaging in the practice. Yet the DOR estimates that the PIC schemes cost the state hundreds of millions of dollars in taxable corporate income every year. "This is all about tax avoidance," Demakis says. After all, he points out, the average taxpayer cannot funnel money into a bogus subsidiary to avoid paying his or her income taxes. Nor can the average Massachusetts small business.

Although Governor Mitt Romney has vowed to veto any proposed tax hikes, there’s a good chance that legislators will embrace some corporate-tax-related bills this session. Two weeks ago, House Ways and Means chair John Rogers (D-Norwood) broached what had once been considered taboo: raising taxes to help ease the budget crisis. And just last week, Senate president Robert Travaglini suggested he’d consider taxes as a "last resort" in lieu of painful cuts to critical programs. Last November, when a ballot initiative to eliminate the personal-income tax failed by an extremely narrow margin, many voters made it clear that they don’t want to pay higher taxes. But bill proponents note that these tax increases wouldn’t affect the average taxpayer. They would, however, boost much-needed revenues for essential services. As State Representative Ruth Balser (D-Newton), who’s sponsoring two MBPC bills, puts it, "If we want to protect average taxpayers and government programs for average people, corporations have to pay their fair share. We need an equitable tax system."

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Issue Date: February 6 - 13, 2003
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