An Application of the BHI Tax Analysis Model to the Massachusetts Mutual Fund Industry, October 1996

The Finance, Insurance, and Real Estate (FIRE) sector accounts for close to 10% of Massachusetts payroll and 8% of jobs in the state, making tax-law changes that affect the sector of interest to opinion leaders and state policy makers. There is longstanding interest in how changes in the excise tax apportionment formula applicable to this sector will affect the Massachusetts economy.

The Beacon Hill Institute (BHI) has developed an econometric tax model for Massachusetts. The goal of the project described in this report was to refine and modify the model for the purpose of analyzing the economic effects of state tax-law changes on the mutual fund subsector of FIRE. We sought to provide (1) useful information on the economic effects of tax-law changes applicable to mutual funds and (2) a significant step toward the creation of a more comprehensive model of the role of the mutual fund subsector in the economy.

In August 1996, the Massachusetts legislature passed An Act to Promote Job Growth in the Commonwealth. The bill lowered tax rates on mutual fund companies by changing both parts of the apportionment formula. The "Destination Test," effective January 1, 1997, limits the sales tax on mutual funds to those that originate in Massachusetts. The "Single Sales Factor" tax, effective July 1, 1997, limits the income tax to the share of mutual funds sold in Massachusetts.

The project involved refining the BHI State Tax Analysis Modeling Program (STAMP) by updating data and data generation methods, and creating sector-specific measures of variables where possible. It also included reestimating the model and simulating the effect on the mutual fund industry within FIRE of the proposed tax-law change.

STAMP is designed to show how changes in state corporate, personal and payroll tax rates affect wages, capital spending, job creation and state tax revenues in the overall state economy as well as in its different sectors. For this project, we refined the BHI model to examine in detail the effects of tax-law changes on the FIRE sector and its five subsectors. The report is organized as follows. Section II provides background on the BHI model. Section III presents the refinements to the model accomplished under this project. Section IV gives the results of estimating the model with its refinements and Section V presents the results of simulating the impact of the proposed tax-law change on the mutual fund industry. Section VI gives specific conclusions and Section VII describes future work.

For a copy of the report, please call 617-573-8750 or e-mail

Format revised on 06-Feb-2007 10:47 AM