Massachusetts OBBBA Conformity | Tax Foundation

Massachusetts is considering legislation that would make it the first state to adopt new taxation of international income since Congress adopted a new system—one largely incompatible with state taxation—under the One Big Beautiful Bill Act (OBBBA). States that already brought in what used to be called global intangible low-taxed income (GILTI) should be looking to decouple. Massachusetts, by contrast, is looking to join their ranks.

Prior to the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Cuts and Jobs Act (TCJA) of 2017, the US featured a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation., meaning the income of US corporations and their affiliates, including controlled foreign corporations (CFCs), was taxable domestically. However, companies were able to take credits against US liability for foreign taxes paid. The TCJA converted the US federal tax code to a territorial system that does not tax foreign income by default.

In changing the scope of taxation, Congress sought to prevent profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. activities which could render greater income outside the reach of US tax laws. To do this, lawmakers enacted a tax on GILTI, which was levied on “supernormal returns” of foreign subsidiaries, deemed to be the result of productive intangible assets. Adjustments and a partial credit for foreign taxes paid were part of the GILTI regime. Essentially, GILTI was an extremely imperfect attempt to tax a share of international income deemed to have involved profit shifting to lower-tax jurisdictions abroad. Importantly, the OBBBA changed GILTI to a tax on net CFC-tested income (NCTI).

With the change from GILTI to NCTI, instead of taxing only supernormal returns, NCTI brings in all international income of a US parent corporation’s foreign subsidiaries, but with a new system of foreign tax credits that effectively only taxes the share that did not face substantial taxes abroad. This is meant to help distinguish between genuine activity abroad and simply transferring profits to low-tax countries. The federal change is not without its shortcomings, but NCTI still aligns with GILTI’s purpose of safeguarding US revenue from profit shifting to low-tax countries. States, however, do not offer foreign tax credits, so conforming to NCTI simply subjects a state-apportioned share of all foreign income to the state’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax., no matter how much tax was paid on it in other countries. This undermines the federal intent of the provisions and represents unsound tax policy.

States that include such income would subject businesses to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. which is contrary to the US tax system and serves to erode a state’s competitiveness. We have detailed other issues state taxation of NCTI creates, making its treatment at the state level more aggressive than at the federal level.

Massachusetts initially brought in GILTI following passage of the TCJA but treated it as a dividend received and provided a 95 percent deduction, thereby including only 5 percent of GILTI income. At the time, Massachusetts employed three-factor apportionment, but provided factor relief by not including foreign sales, property, or income into the state’s apportionment formula.

In 2023, Massachusetts adopted a single-sales factor apportionment formula but did not amend its treatment of GILTI. Now, through H.3110 and S.2033, lawmakers are proposing significant changes, raising the inclusion of GILTI/NCTI income to 50 percent without any factor relief. While the change might increase state revenue, the legislation under consideration fails to align with the intent of the federal law.

Massachusetts ranks 41st overall on the Tax Foundation’s State Tax Competitiveness Index, with a corporate income tax component rank of 33rd. Further, the Commonwealth ranks in the bottom ten of all states in the property, individual income, and unemployment insurance tax components of the Index. Importantly, had the proposed NCTI reforms been in place at the time of our most recent Index, the Bay State’s corporate income tax ranking would have fallen to 38th.

Massachusetts is a net outmigration state—losing population and adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods—while lawmakers continue to pursue unsound means to raise revenue. Rather than focus on GILTI/NCTI expansion, the state would do well to reform other parts of its code to become more competitive—regionally and nationally.

Voters amended the state constitution in 2022, adding a four percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on income greater than $1 million. This set aside the state’s previously competitive flat individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source, making the state less attractive to businesses and households alike. Massachusetts is also a national outlier by imposing a separate payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. for non-unemployment insurance purposes.

Corporations in the state already face an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. which imposes a high burden on businesses with significant amounts of capital in Massachusetts. The state’s tax code features a throwback rule that subjects businesses to high tax burdens when they sell tangible property into states with which they do not have nexus. Unlike other states that conform to the federal code, Massachusetts offers no first-year expensing, which discourages business investment.

Additionally, property taxes in Massachusetts are among the highest in the country, though are moderated through a levy limit, conventionally called Proposition 2 ½, which helps control future growth. However, taxpayers are liable for both an estate and real estate transfer tax.

Massachusetts lawmakers should look for opportunities to reform the tax code, revamp the state’s competitiveness, and stem the tide of outmigration. This bill, by contrast, would double down on the economically uncompetitive features of the Commonwealth’s existing tax code. Aggressively expanding NCTI inclusion is not productive or competitive. Lawmakers should prioritize sound reform rather than chasing offshore revenue which is not appropriately attributed to the state.