Business Tax Breaks: Help Vs. Harm
Wise
What role do business tax breaks play in our state's economic development strategy? And how has this role changed over time?
These are the questions that motivated our recent report on business tax breaks in Massachusetts, which focused on a class of tax breaks we call "special business tax breaks," meaning tax breaks that: 1) apply to businesses, and 2) have as their most basic rationale the effort to bolster economic development. (Other kinds of tax breaks include those designed to minimize double taxation and those that mirror the federal tax code.)
What we found is that, over the last 15 years, the amount of money spent on special business tax breaks has increased substantially. In fiscal year 1996, Massachusetts spent $342 million on special business tax breaks (adjusted for inflation). In fiscal year 2012, it spent $770 million — more than twice as much.
Another way to measure spending on special business tax breaks is to adjust for the size of the economy. With a growing economy comes an increase in the resources available to devote to economic development. So it makes sense to look not only at the number of dollars we're spending, but also at the share of our total resources. When we adjust for economic growth in this way, we find that between fiscal 1996 and fiscal 2012, spending on special business tax breaks increased 60 percent.
That growth rate is high relative to other major facets of state government. By way of comparison, when we again adjust for economic growth, we find that within those 17 fiscal cycles, spending declined for law and public safety (15 percent), human services (33 percent), and local aid (51 percent), while spending on education was essentially flat. Health care is the only major area that saw meaningful growth.
To be clear, these tax breaks do not account for a very large portion of our economic resources. They're small relative to the size of the economy, and the total increase is much smaller than the growth of health care costs, for instance. But given that the commonwealth has finite resources available to invest in economic development — a limitation felt even more keenly during these economically challenging times — it's imperative that state economic development dollars be invested thoughtfully and to maximum effect.
The question that needs to be asked about business tax breaks is not so much "Do they help businesses in Massachusetts?" as it is "Is this the best use of our limited resources?" Would we be better served if we used some of this money for education, worker training, infrastructure or public transit?
Kurt Wise is a policy analyst at the Massachusetts Budget and Policy Center, based in Boston.
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