Saddled with unusually high taxes, community banks in Massachusetts are looking for relief from the state legislature. Lawmakers are considering a bill that would lower the state income tax rate on banks to 10.5% from 12.5%.

That would leave banks paying the same rate as all other Massachusetts corporations, including such rivals as mortgage firms and investment banks. The rate would also be applied to larger state-chartered credit unions, which currently pay no income taxes.

"We're in favor of it passing - and the sooner the better," .said Don Glass, president of the Community Bank League of New England. "Any help in the tax area is welcome. To be taxing financial institutions at a different rate than other institutions is inherently unfair."

Right now, Massachusetts levies a higher income tax rate on banks than any other state, according to a 1993 study by University of Tennessee economics professor William F. Fox. The state with the next-highest income tax rate is Hawaii (11.7%), followed by Connecticut (11.5%), California (11.1%), and New York (10.3%).

Even with the proposed cut, Massachusetts' tax rate would rank among the five highest, just above New York. But Bay State bankers are clearly pleased by the prospect of some relief.

Bankers claim that without the reform, larger banks and holding companies will relocate their headquarters to states with lower taxes, and smaller, independent banks will be unable to compete, leading to the loss of jobs in the state.

"We think it's critical that we move forward on the bill in order to create a favorable business climate for job creation and economic development," said Kevin F. Kiley, executive vice president of the Massachusetts Bankers' Association.

But the bill faces some opposition, with critics citing a state Department of Revenue estimate that the reform would cost Massachusetts at least $20 million in lost income.

Harm to Business Climate Seen

The bill, which is now before the state Joint House-Senate Taxation Committee, was drafted after a special commission determined that the bank tax structure was harming the state's business climate.

But Cindy Mann, an attorney with the Massachusetts Law Reform Institute and a member of the commission, said the bill does not conform to the commission's final recommendation for a bill that won't cost the state.

"We recognize the necessity for some of [the reform], but we had sought to have it done in a different way," added Laura Barrett, an official with the Tax Equity Alliance of Massachusetts.

Mr. Kiley, however, said the state "runs the risk of losing even more money" because of job losses. He said the state gets about $10 million in sales and income taxes from every 1,000 jobs.

The legislation would also exempt Massachusetts-based banks and holding companies from paying taxes on money earned out of state and would impose the 10.5% tax on out-of-state credit card companies doing business in Massachusetts.

The proposed tax on credit unions would apply to the roughly 35 credit unions in the state with assets over $50 million.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.