Report Blind To Nuances In Mass. Economy
Dear Editor,
With the front page article “Bay State tax system under scrutiny,” (WBJ, April 26, 2010), Associated Industries of Massachusetts, the principal statewide employer organization, finds itself in agreement with both sides of the debate about tax incentives.
We have always believed that a favorable overall business climate, augmented by well-calculated, limited tax incentives available to all comers, is the best guarantee of a strong economy; yet our broad-based membership reminds us that different sectors have different tax situations and concerns.
Points Of Difference
One point on which we are unequivocal, however, is the misleading nature of the Council on State Taxation’s recent study as a guide to “tax fairness.”
There are at least three reasons why Massachusetts should be expected to derive a lower proportion of its tax revenues from taxes on business than the national averages for all states. One has to do with the kinds of employers we have, one with the kinds of jobs they provide, and the third with the business climate of the commonwealth.
As Worcester-area resident well know, the nonprofit sector is unusually important in our state’s economy. Our largest employment sector is the “health and educational services” category, mostly private nonprofit hospitals, universities, and similar institutions, which represents 21 percent of Massachusetts employment, compared to 15 percent nationally. About a third of the state’s 100 largest private employers, and most of the top 25, are nonprofits. Nonprofit institutions are partly or wholly exempt from most state and local taxes; they do, however, create a large number of well-paid jobs, which generate revenues from personal taxes.
On the for-profit side as well, employers in our economy are heavily concentrated in high-end services and advanced manufacturing, and tend to employ people whose high skills command high pay. As a result, returns from business activity here, as compared to most other states, tend to flow to employees more than to employers. This leads, in the natural course of events, to a higher reliance on individual taxes as opposed to business taxes.
Moreover, the kinds of for-profit industries which are most important here are relatively moveable – much easier to relocate than an oil field or steel mill – and therefore placed at risk by policy decisions that result in an unfavorable business climate. A close look at the Council on State Taxation’s study reveals that the states with high reliance on business taxes tend to be mineral-rich, often lower-income ones, such as West Virginia, Wyoming and Alaska.
Our state’s relative reliance on individual taxes is largely, then, a matter of “where the money is.” There is also a fiscal policy advantage: Business taxes (like capital gains taxes) are inherently cyclical, and over-reliance on them contributes to fiscal instability for the commonwealth and for communities with large commercial tax bases during times of economic downturn. The commonwealth is much better off keeping well-paying employers here and taxing their employees than it would be over-taxing the employers and losing the jobs. That would be an example of “killing the goose that lays the golden eggs.”
Andre Mayer
Senior vice president for research
Associated Industries of Massachusetts (AIM)
WBJ Web Partners
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