Massachusetts lawmakers are considering legislation that would change how the state taxes the international income of local businesses. This move could make Massachusetts the first state to adopt a tax system that seems designed to double tax companies, ultimately harming the state’s economic competitiveness.
Understanding the Tax Jargon: From GILTI to NCTI
To grasp the issue, we need a little background on federal tax law:
- The Shift to a Territorial System: After the Tax Cuts and Jobs Act (TCJA) of 2017, the U.S. changed its federal system. It stopped automatically taxing all foreign income of U.S. corporations and their foreign affiliates.
- The Anti-Evasion Fix (GILTI): To prevent companies from simply moving all their profits overseas to avoid U.S. taxes (a practice called profit shifting), Congress created a complex tax called GILTI (Global Intangible Low-Taxed Income). The goal was to tax only the “super-normal” returns—income that looked suspiciously like it was shifted to a low-tax country.
- The Current Federal System (NCTI): A recent law updated GILTI to NCTI (Net CFC-Tested Income). NCTI broadened the tax to include all foreign subsidiary income. Crucially, the federal government still provides a system of foreign tax credits to ensure the U.S. only taxes the profits that didn’t face substantial taxes abroad.
The federal intent is key: Tax income that evaded foreign tax, not income that was already heavily taxed overseas.
Why Massachusetts’ Proposal Undermines Federal Intent
The federal system prevents double taxation because of those foreign tax credits. States, including Massachusetts, do not offer these credits.
Massachusetts currently includes only a tiny fraction (5%) of this international income in its tax base. The new bills being considered (H.3110 and S.2033) propose a massive, uncompetitive change:
- Increase the inclusion rate to 50% (up from 5%).
- Offer absolutely no tax credits or other relief.
By including 50% of this income without credits, Massachusetts would be subjecting a large portion of a company’s income to state tax, regardless of how much tax was already paid on it in another country. This is the very definition of double taxation, and it completely ignores the careful design of the federal law.
The Real Price of Unsound Tax Policy
Massachusetts is already struggling to compete, ranking 41st overall nationally on the Tax Foundation’s Tax Competitiveness Index. The state has recently passed other measures that make it less attractive, including:
- A new 4% surtax on income over $1 million.
- Some of the highest property taxes in the country.
- Unique business taxes, like the corporate excise tax and the throwback rule, which penalize companies for selling goods into states where they lack a physical presence.
If this new NCTI law passes, Massachusetts’ corporate tax ranking would fall even further.
The state is currently losing population and income to other, more competitive states (it’s a “net outmigration state”). Instead of seeking complicated, aggressive, and uncompetitive means to raise revenue, lawmakers should focus on comprehensive tax reform that actually makes Massachusetts a better place for businesses and families to operate and thrive.
Aggressively expanding the tax on international income is an unproductive move that will only hurt the Commonwealth’s future competitiveness.