The Neutrality of Massachusetts' Taxation of Financial Institutions

by Robert Tannenwald
May/June 2000

The provision of financial services has changed dramatically over the past two decades. Technological innovation and deregulation have extended providers' geographic range and broadened the array of products they are capable of delivering. These changes have intensified competition among financial service firms. In recent years Massachusetts, like other states, has passed legislation designed to narrow disparities among the tax burdens of these institutions. At the same time, the Commonwealth has passed tax cuts designed to enhance the competitiveness of Massachusetts-based financial institutions. Consequently, the degree to which the Commonwealth has actually leveled the tax playing field for them is unclear. This article attempts to resolve the issue.

The author concludes that tax changes enacted in recent years have widened some disparities in tax treatment of Massachusetts-based financial institutions while narrowing others. Tax burdens on most Massachusetts-based financial institutions have been reduced, enhancing their competitive standing vis-a`-vis their out-of-state rivals. However, it is not clear that the Commonwealth has narrowed interindustry differences in tax burdens. The author proposes that in the interests of tax neutrality, fairness, and administrative simplicity, the Commonwealth might consider narrowing disparities in tax treatment among financial institutions. He believes that measures designed to reduce differences in tax burdens merit further attention.

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