Michael Widmer and Jim Klocke

To keep jobs, don’t kill tax incentives

By Michael Widmer and Jim Klocke
Globe Staff / March 29, 2011

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THE DEBATE about state economic policy has escalated in recent days, fueled by Fidelity’s decision to move jobs to neighboring states. While it’s good to have an honest and open conversation about state economic policy, we shouldn’t focus the discussion so narrowly that we miss the bigger picture.

Every month thousands of Massachusetts companies make decisions about adding, locating, or reducing jobs. The question is how to make more of those decisions go in our favor. The best way to do so is by sustaining the state’s leading industries, including financial services.

Financial services is a huge, underrealized contributor to Massachusetts’ economic strength, directly employing nearly 170,000 people and supporting one to two times that number of jobs in related industries.

The tax benefits from those jobs are immense — income tax payments representing 20 percent of total income tax collections, hundreds of millions of dollars in state sales taxes, and hundreds of millions in property taxes.

How can this economic cluster be protected and nurtured in the face of competition and technological innovation that enables many of its functions to be performed anywhere in the world? A key answer can be found in a forward-thinking tax policy enacted in the mid-1990s — single sales factor apportionment.

The single sales factor bases firms’ state income tax on their sales in Massachusetts, instead of on a combination of sales, property, and payroll. It has been unfairly labeled a “Fidelity tax break’’ — unfair because it affects an entire industry, not just one company, and because it is not a tax break.

When Massachusetts passed a single sales factor law in the mid-1990s, it lowered the cost of employing people here. It spurred the creation of thousands of new jobs, preserved thousands more, and was fully complied with by the companies it affected.

More than half of all states have adopted some form of single sales factor apportionment. The adoption of single sales by neighboring and competitor states should lead us not to question its effectiveness or validity, but to strengthen our resolve to preserve it.

The financial services story — of large economic impacts, and tax policies that promote growth — applies equally to manufacturing, high technology, and other critical industries.

If we preserve the single sales factor, and take additional steps to lower the cost of job creation, we will win more than our fair share of battles for jobs and investment.

The future of the Massachusetts economy depends on it.

Michael Widmer is president of the Massachusetts Taxpayers Foundation. Jim Klocke is executive vice president of the Greater Boston Chamber of Commerce.