We read the Mass Budget Policy Center’s recent piece entitled “How Do Massachusetts Business Taxes Compare to Other States?” which presented statistics purporting to show that Massachusetts’ business taxes rank 10th lowest in the nation as a percentage of gross state product (GSP) and are $2.5 billion below the national average.
In a previous MassBudget report, “Gone With the Wind”, the Center bemoaned the reduction in corporate income taxes in Massachusetts, writing:
“It is time to look closely at the corporate income tax system in Massachusetts to ensure that businesses using state services to earn sizable profits pay their fair share of state taxes.”
“Policymakers could reverse this decline [in corporate income tax] and ensure that corporations pay their fair share of taxes.”
With MassBudget’s history, this new article seems to suggest that Massachusetts’ business taxes are too low and legislators should raise them – by $2.5 billion.
However, other comparative state tax policy analysts have reached a far different conclusion.
Tax Foundation ranks MA 43rd worst state for business taxes (2012)
The Tax Foundation, a nonpartisan tax policy think tank in Washington, D.C., released a“Location Matters” report in 2012, which analyzed the total effective business taxes in the 50 states and the District of Columbia, including nominal tax rates, incentives, average tax costs and industry-specific taxes. They concluded that Massachusetts ranks 7th highest for taxation of mature businesses and 8th highest for taxation of new businesses.
The Tax Foundation report conducted an in-depth analysis of taxation levels in 50 states by examining seven hypothetical business examples, calculating actual state and local taxes for each. The results are as follows:
Forbes Magazine ranks MA 2nd-worst in business costs of 50 states (2013)
An even broader view of comparative state-by-state business costs is presented in Forbes Magazine’s “Best States for Business in 2013”, which ranks Massachusetts as the 2nd-worst state for business costs, ahead of only Hawaii. Forbes calculates business costs by analyzing labor, energy, tax costs, and other factors.
Forbes used Moody’s Analytics, which determines the burden of labor and energy costs, along with the data from the Tax Foundation Location Matters report mentioned above. In this widely-read and comprehensive analysis of business costs, Massachusetts ranks dauntingly low, virtually tied for last place with Hawaii.
But Forbes was not the only analysis to rank our business costs among the worst in the nation.
CNBC ranks MA 4th-worst in business costs of 50 states (2014)
CNBC did a similar, more recent study and found that Massachusetts has the 4th-worst business costs of the 50 states. They factored in income taxes, property taxes, business and gas taxes, utility costs, labor costs and even rental costs for office, commercial and industrial space.
They collected data from the CoStar Group, Council on Competitiveness, National Association of Manufactures and consulted with business, economic development organizations, the states, and finally the CNBC Global CFO Council.
(UPDATE) Thumbtack Survey and Ewing Marion Kauffman Foundation give Massachusetts a D+ for small-business friendliness
Recently, the Boston Herald reported that Thumbtack, a business to customer match-maker and the Ewing Marion Kauffman Foundation, a think tank, gave Massachusetts a shocking D+ for their small-business friendliness.
Massachusetts’ report card would have resulted in a long-term grounding for any student: D+ in overall friendliness, D is ease of starting a business, D in regulations, D+ in health and safety, D in tax code, D in licensing and the list goes on. Only six other states brought home worse report cards.
The only praise-worthy mark was an A- in ease of hiring. We may have great employees, but soon there will be no place for them to work.
The study was based on a survey of over 12,000 small-business owners. They were interviewed and these were there honest opinions of business-owning in Massachusetts.
Drawbacks of MassBudget’s methodology
One flaw in MassBudget’s analysis is the inclusion of non-profits in its computation of gross state product, which effectively skews the results. Non-profits are tax-exempt and according to the Massachusetts Financial Service Sector constitute nearly 13%, or $50 billion of Massachusetts GSP.
If non-profits’ percentage contributions to state GSP were fairly uniform across all states, the GSP metric would be more meaningful. But Massachusetts is a relatively unique case. For example, seven out of Massachusetts top 10 employers are nonprofits. According to a study from Johns Hopkins University, the non-profit share of private employment in Massachusetts is 16.7 percent – more than twice that of California – and two-thirds higher than the national average (Massachusetts 16.7% vs. 50-state average 10.85%). Therefore, MassBudget’s chosen metric for comparing business taxes across states does not result in an apples-to-apples comparison.
Another flaw in the COST report methodology is that it does not take tax incentives and industry-specific taxes into consideration. For example, where Massachusetts has a 25 percent tax credit for film production, it doesn’t offer similar treatment to a manufacturing company. States across the country offer a broad array of such incentives and industry specific tax programs that should be factored into a comparative analysis.
A third flaw is that the MassBudget report does not consider some significant data included in the COST report that does little to bolster MassBudget’s conclusions. Pioneer calculated business tax rankings on a per capita basis, rather than a GSP basis, using the state-by-state data reported in the COST study on its third page. We used the 2010 U.S. Census statistics for states’ population.
With this metric, Massachusetts has the 5th highest corporate income tax per capita, the 6thhighest individual income tax on business income per capita, the 2nd highest unemployment insurance tax on business per capita, and the 17th highest total business taxes per capita of the fifty states.
Were state legislators convinced to add $2.5 billion more in Massachusetts business taxes in order to achieve what MassBudget calculates to be the national average, Massachusetts would actually rise in rank from 17th in total business taxes to 5th, on a per capita basis.
Finally, the MassBudget metric does not account for business-owners’ primary concerns. Business leaders want to know how much it will cost to operate a business in Massachusetts in comparison to other states. The portion of GSP paid by corporations won’t often make it into boardroom discussions about siting decisions. Instead, business leaders by necessity consider the overall cost of doing business.
According to Forbes, it costs 22.3 percent more to do business in Massachusetts than the U.S. average. It took into consideration “labor regulations, health-insurance coverage mandates, occupational licensing, tort system, right-to-work laws”, tax incentives, bond rating, general obligation debt and transportation infrastructure. Forbes also ranks us as the 15th worst state for business regulations.
Massachusetts is already among the top nine states from which people are fleeing. According to a University of Massachusetts study, each year since 2000, Massachusetts has consistently lost more residents that it has gained. Massachusetts’ high cost of doing business, costly regulatory environment, and relatively high taxation levels are contributing to this exodus.
But not all is lost.
Despite its high business and regulatory costs, Massachusetts still ranked 13th in Forbes study for best places in the U.S. to do business.
Why?
Largely because we ranked first in quality of life! Forbes accounted for our best in the nation school test performance, overall statewide health, culture and recreation opportunities, weather, and our many four-year colleges, and ranked Massachusetts as number one in the nation.
So should we hike taxes by $2.5 billion as MBP suggests? Certainly not. Doing so would do nothing to lift Massachusetts from its 2nd to worst state ranking in cost of doing business.
In conclusion, MassBudget’s report supports its long held position that the Massachusetts business community is not paying its fair share of taxes. Its GSP-based analysis purports to show that Massachusetts’ companies are paying about $2.5 billion less than they should be. Other analysts use different metrics and conclude the opposite: that Massachusetts business taxes are high in comparison to other states and that it is among the most expensive states in which to do business.
Many of the factors that contribute to high business costs are intractable, such as our relatively high cost of housing, medical care, and labor. But among the factors that contribute to high business costs are business taxes, and that is one thing that the legislature can directly control. Massachusetts boasts a growing economy, intelligent workforce, and superb quality of life, but in order for us to compete with other states to create and retain private sector jobs, we must do everything possible to enhance our competitiveness. Raising business taxes by $2.5 billion is not one of those things.
