Study Calls Enterprise Value Tax a "Job Killer"

A proposed federal Enterprise Value Tax will double taxes on business partnerships in Massachusetts, adding $611 million to the state’s federal tax burden, according to a study by the Beacon Hill Institute at Suffolk University.

As a result of the tax, the state will lose 5,400 jobs, $9.5 million in investment and $673 million in disposable income, says the new study, The Enterprise Value Tax: What it Means for the Massachusetts Economy, published by the Beacon Hill Institute and sponsored by the Massachusetts Chamber of Commerce.

The President’s Plan for Economic Growth and Deficit Reduction to the Joint Select Committee on Deficit Reduction contains a provision that would tax, as ordinary income rather than capital gains, the net proceeds from the sale of what is deemed an “investment services partnership interest”(ISPI). An ISPI is any interest in an investment partnership that is acquired by a person as a result of activities involving the purchase and sale of certain “specified assets,” defined to include partnership interests, securities and real estate holdings.

Under current law, the gains from the sale of a partnership are taxed at the capital gains rate of 15 percent, consistent with the general rule that business interests should be treated as capital assets. The EVT would raise the effective tax rate from 15 percent to 30 percent on a total of $4.073 billion in capital gains received annually by Massachusetts residents, who receive these gains in exchange for putting their own capital and earnings at risk.

The proposal reverses the longstanding practice of taxing all long-term capital gains at 15 percent. U.S. tax law provides for the preferential treatment of capital gains in order to encourage saving and risk taking. This treatment of capital gains mirrors similar treatment of investment income and pension contributions and earnings.

The tax would fall mainly on the financial, insurance and real estate sectors, which comprise 25 percent of the Massachusetts economy. Massachusetts ranks second in the nation in venture capital per person. Although publicly touted as a tax on financial firms, the EVT will have broad sweeping impact on other industries such as family-owned businesses, natural resources firms, and many other partnership businesses, according to the study.

“The EVT would fall most heavily on states like Massachusetts and California, which are important centers of high-tech innovation and of venture capital and turnaround investment funds," said David Tuerck, executive director of the Beacon Hill Institute. "The EVT is a particularly misbegotten way to achieve deficit reduction. It punishes long-term investment and takes capital out of the economy.”

“This proposal could inflict lasting damage on the Massachusetts economy just as we are starting to recover from a recession,” said Debra Boronski, president of the Massachusetts Chamber of Commerce. “If Congress removes nearly $700 million in disposable income from our economy, more small businesses will fold, and we will slip back into recession. We need more investment in our economy right now, not less. But this proposal provides a clear disincentive for investment in job creation.”