Connecticut bankers are pushing for a state law that would exempt financial services firms from paying taxes on mortgage interest income.

Similar laws have been enacted in Massachusetts and Rhode Island. And unless Connecticut follows suit, bankers said, its banks could shift mortgage operations-and jobs-out of the state.

"We would like to keep these investments and their related jobs here in Connecticut," said Gary Smith, president and chief executive officer at Ridgefield Bank. "But ... it would be almost impossible to ignore the cost savings that could be achieved."

Ridgefield Bank, with $280 million of assets, pays about $400,000 a year in state tax on real estate-backed investments, Mr. Smith said. In 1997, Connecticut financial companies paid about $16 million in taxes on mortgage interest income, said Gene Gavin, commissioner of the state Department of Revenue Services.

Legislation was introduced in February and passed a state Senate committee in March. The banking industry is lobbying heavily to get the bill enacted before the General Assembly adjourns May 6.

"It's an education issue," said Gerald M. Noonan, president of the Connecticut Bankers Association. "You have to go legislator to legislator, so to speak, and make it clear that doing nothing is not right."

If the bill is enacted, Connecticut banks-as well as mortgage companies and other financial services firms-would be permitted to shift mortgages into so-called passive investment companies. The income generated by these companies would be exempt from corporate taxes.

The legislation was drafted to make Connecticut more attractive to financial services firms. States often use incentives to attract and retain manufacturers and other large employers, and they are using the same tactics to woo banks, insurance firms, and mutual fund companies.

"Financial services is a key industry in this state, and we want to keep it that way," said Mr. Gavin, the state tax official.

A similar law was enacted in Rhode Island in 1994, the year Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act. Rhode Island lawmakers passed the bill to guard against banks' moving operations out-of-state. Massachusetts has since enacted a law that reduces the tax burden on companies that earn income on mortgages.

The Connecticut proposal is supported, too, by the state's thrifts, and regional banks have endorsed it.

"Clearly Connecticut is getting in step with the rest of the region," said Richard C. Angelone, senior vice president of corporate taxes at Boston's Fleet Financial Group Inc.

But the bill could face opposition from out-of-state lenders. As things now stand, a Massachusetts or Rhode Island lender pays no tax to Connecticut for a mortgage on a Connecticut property. To make up the expected $16 million tax-revenue loss, Connecticut lawmakers are considering collecting taxes from those out-of-state companies.

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