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Tax credits and special concessions for businesses require the transparency of a formal audit

Melvin B. Miller
Tax credits and special concessions for businesses require the transparency of a formal audit
“Make sure we get in on the tax break. We’ll worry about the jobs later.” (Photo: Dan Drew)

Corporate tax credits and concessions reduce the state revenue available to finance the public’s business. State Auditor Suzanne Bump seeks the authority to assess these programs to determine whether such tax expenditures are truly beneficial.

During one of the final debates for mayor of Boston, Jim Braude asked John Connolly to justify his vote in the City Council to provide a tax credit to Liberty Mutual Insurance Company. Liberty Mutual is constructing its world headquarters in Boston.

Sensing that the question would cause some difficulty for Connolly, Marty Walsh jumped into the fray. Deftly averting a potentially damaging encounter, Connolly reminded his opponent that Walsh had actually requested city council members to support the measure.

The question of the Liberty Mutual tax credit quickly disappeared as a campaign issue. The building unions love tax credits that promote construction development and create jobs. Cities and states are always ready to offer tax credits to induce major companies to locate within their borders in order to provide tax revenue from their employees and from profits earned by local supporting businesses.

However, there should also be a way to evaluate whether the benefits to the community are greater than the cost of the tax expenditures. The Department of Revenue (DOR) can determine in a tax audit whether the deductions have been taken appropriately, but there is no regular assessment of the value of the tax incentives to the city or state.

The state auditor already has the authority to investigate to determine whether state programs attain their established goals. It makes no sense to reinvent the wheel and create another state agency to make an equivalent assessment of tax concessions. As might be expected, representatives of the business community are opposed to the idea of an audit.

Bump reviewed corporate tax breaks in 2011 to show that the Commonwealth loses more than $2 billion in revenue per year from tax concessions. According to a report from the auditor’s office, revenue lost in tax breaks has grown at “nearly double the rate of the state budget over the past five years.”

The problem is that corporations, just like individuals, have the right for their tax returns to remain secret except to authorized personnel at the DOR. The law would have to be modified in order for officials from the auditor’s office to acquire the tax information necessary to perform the special assessment. According to the auditor, 36 other states already provide access to such information by the auditor’s office.

The allowance of tax concessions will continue to be a useful strategy for corporate development by cities and towns. However, the opportunity for fraud and political abuse is great. There must be great transparency in the administration of such strategies to assure that the promised public advantage is attained.