October 17, 2007

Curse endures for business: Taxachusetts saps jobs, profits

This commentary originally appeared in the Boston Herald on October 17, 2007.

Just as The Curse haunted the Red Sox [team stats] for 86 years, the label of Taxachusetts has continued to haunt the Massachusetts economy.

The Tax Foundation has been foremost in providing ammunition to squelch the name, publishing annual rankings of state-local tax burdens that haven’t put Massachusetts near the top in 25 years. This year it ranked 28th, yet the Taxachusetts label persists. North Carolina (19th), South Carolina (26th) and Utah (27th) all have higher tax burdens in 2007 than Massachusetts, yet they are regarded as tax havens.

So why can’t Massachusetts shake the notorious nickname? Partly, it has a great ring to it, and tax protesters are unlikely to ever let it go. But there is still some factual basis for it: the state’s egregious business taxes. As famed economist Henry George said, “The mode of taxation is, in fact, quite as important as the amount. A people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in any other way, could be borne with ease.”

How does Massachusetts rank by this other tax metric? For five years, the Tax Foundation has been publishing a companion piece to its burden rankings, the State Business Tax Climate Index. Massachusetts ranks only 34th best in 2008, indicating that its moderate tax burden is extracted with unnecessary pain to the economy.

That’s worse than Illinois (28th), Michigan (29th) and Louisiana (32nd), places thought of as tax hells.

When the first edition of the Index came out in 2003, Massachusetts ranked much better, 26th best. Massachusetts’ population has also dropped, which has occurred in only two other states in recent years.

And other measures tell a similar story of decline. Income growth in Massachusetts between 2003 and 2006 was only 34th fastest and more than 2.5 percentage points lower than the national average. During the same time span, the growth of total economic output was almost the slowest in the nation-48th.

The economic picture in Massachusetts isn’t rosy, and Gov. Deval Patrick is likely to prefer spending remedies: more money for education, for transportation infrastructure and crime prevention. That approach could take a generation and might not work anyway.

A much quicker fix would be to attract companies and their jobs with a more competitive tax system, and those changes can be made in one legislative session.

Despite outstanding individual income and sales tax systems, Massachusetts’ overall business tax climate lags because of its corporate tax, unemployment insurance tax and property tax systems. These are the first places the state needs to look if it wants to be friendlier to businesses.

Massachusetts has the fourth highest corporate income tax rate, 9.5 percent. Add that to the federal rate of 35 percent, and Bay State businesses pay a higher corporate tax rate than in any other developed nation. It’s 36.1 percent in Canada, 34.4 percent in France, 30 percent in Britain and 28 percent in Sweden.

Luckily for Massachusetts, all of New England has high corporate tax rates, so the Bay State could out-compete all its neighbors with a fairly modest rate cut to 7.4 percent.

The unemployment tax is little known but one of the most economically harmful taxes because it kicks businesses when they’re down. Unfortunately, the rates and enforcement rules in Massachusetts are second worst nationally.

Massachusetts’ property tax system ranks only 45th best in the State Business Tax Climate Index, which measures not only residential and commercial property taxes but estate taxes, inventory taxes and other taxes on assets. Among this assortment of taxes, one of Massachusetts’ worst is its business property tax. And as for the estate tax, 33 states have abolished theirs, so unhealthy or aged estate holders are going to be moving.

Massachusetts has long paid the price for the Taxachusetts label. Although the state’s taxpayers enjoy a below-average tax burden, the label is still sticking because of a poor business tax climate. If Massachusetts improves its business taxes, it will see its economic fortunes change and the nickname might finally go the way of the Curse.