No state in America has a higher percentage of jobs in life science fields than Massachusetts, according to a report released Wednesday by Northeastern University. But there's a dark undercurrent looming for the Bay State in those bullish numbers.
The life sciences industry is on the leading of edge of "tax inversion mergers", wherein large life sciences companies aren't just consolidating, they are also moving their headquarters overseas.
Take medical device manufacturer Covidien. While the company’s headquarters is in Mansfield, Massachusetts, its legal home is in Ireland. This week, a rival company, Medtronic, announced it’s acquiring Covidien for $49 billion. A big reason why is that they can now claim Ireland as their home base.
"Why did Medtronic do the deal? Well, if you’re a foreign-based company, the tax rules are just more favorable," said Martin Sullivan, chief economist at Tax Analysts, a nonprofit tax information publisher.
"If you have a lot of foreign profits being booked in low-tax locations and tax havens, you can bring them back to the United States tax-free," he said.
And with a corporate tax rate of just 12.5 percent, Ireland fits the bill as a low-tax location. By contrast, the corporate tax rate here in the U.S. can be as high as 35 percent. Sullivan says these so-called tax inversion mergers have been on the rise since 2006, and picking up steam as of late.
"If these deals continue at this pace, you’re going to have a set of tax rules where one part of corporate America is taxed very favorably and another part of corporate America is under a different and tougher set of rules," said Sullivan.
According to Ameek Ponda, a tax partner at Sullivan and Worcester, not only is the U.S. tax rate higher than most other countries, it’s also more complicated. He says that for years our exceptional tax system made sense because we were an exceptional country.
"By almost any metric, good or bad, we punch well above our weight of five percent of the world's population: The amount of economic activity, the number of PhDs,the number of patents," Ponda said.
But that is starting to change.
"People are going to catch up, people are going to be on a par, maybe a head of us in certain metrics," Ponda said. "The world’s not going to look, on a relative basis, like it did in 1960. 2060 will be very different."
With competition heating up, leaders on both sides of the political aisle, as well as Sullivan and Ponda, say it’s high time for tax reform here in the U.S. Without it, Ponda says he won’t be shocked to see more multinational companies based in the U.S. head overseas.
"If there’s a variety of jump balls, you’ll get your fair share and some will go the other way," he said. "What I think is generating a lot of heat — and some light here, as well — is the idea that, you know, the jump balls are a little skewed in the direction of parenting and headquartering abroad."
And for us here in the Bay State, with an ever-increasing focus on the tech sector and the life sciences industry, those jump balls loom large.
"For those kinds of companies, those kinds of jobs, those things kinds of economies – and that’s the way we fancy ourselves in Massachusetts – there really is a need to innovate, to keep up, to stay ahead and to win a fair share of jump balls," said Ponda.
If they don’t, you might just see more Massachusetts companies that are thinking globally, start acting locally – in some other country.