Opinion Fragile Progress, But Most State Business Costs Are Still High

Despite a decade of progress, high business costs in key areas continue to hold back the Massachusetts economy, and more must be done to make the Commonwealth competitive.

Ten years ago, Massachusetts ranked well above the national average in all five areas analyzed in a recent report, Fragile Progress: Reining In Massachusetts’ High Business Costs — health care, electricity, unemployment insurance, workers’ compensation, and taxes. But since then, a series of reforms has narrowed the gap in each category. Nevertheless, Massachusetts businesses continue to pay a premium in most areas, with costs well above average in health care, electricity, unemployment insurance, and corporate and personal income taxes.

While the state’s immediate fiscal problems are at the top of everyone’s agenda, policy makers and others must remain focused on the fact that economic recovery — and future tax revenues — are directly linked to maintaining and improving the state’s competitive position.

Prepared by the Massachusetts Taxpayers Foundation with the Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce, the report compares business costs in Massachusetts with those in other states, particularly the other high-technology, large industrial, and New England states with which the Commonwealth competes. Significant findings, and some recommendations, include:

• Health Care: Although the rate of employer health care premium rate hikes eased during the mid-’90s, health care cost increases paid by employers and consumers alike have again returned to double-digit annual levels, nationally and in Massachusetts.

Recommendation: The Commonwealth should not impose new mandated health care benefits, expand HMO liability, or enact other laws that produce higher costs. Policy makers must also avoid continuing to shift costs from public to private sources in an attempt to close the state’s budget deficit, as was effectively done by tapping the Medical Security Trust Fund. Adding to these cost burdens would exacerbate an already serious problem and lead to an increase in the state’s uninsured population.

• Electricity: Commercial and industrial electricity rates in Massachusetts have been well above average over the last decade, but the gap is closing. Commercial rates were 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} above the national average in 2000, compared to a 36{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} gap in 1997. Most competitor states have lower commercial rates, though costs in other New England states are higher.

Recommendation: The continued evolution of competitive wholesale and retail electricity markets requires stable rules, prices, and supplies. Massachusetts must stay the course in restructuring and not make any sudden or severe changes.

• Unemployment Insurance. Although the state’s average UI cost has declined considerably over the past decade (as has the state’s effective tax rate on wages), it remains among the highest in the nation. In 2002, the average cost per employee in Massachusetts was 70{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} above the national average and seventh-highest in the country.

Recommendation: Having averted an 80{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} increase in rates for 2003, attention must now turn to systemic reforms that will replenish the trust fund while allocating costs more equitably. Specifically, major reform of the experience-rating mechanism must be part of any effort to stabilize the system.

• Taxes: The Commonwealth has one of the heaviest personal income tax burdens in the country and higher-than-average corporate income and property taxes, but one of the lowest sales tax burdens and relatively low fees and charges.

Recommendation: Over the past decade the Legislature has approved a number of tax changes that have improved the competitiveness of the Massachusetts economy. These reforms have focused on key sectors, including manufacturing, banks, insurers, and mutual fund companies. The organizations authoring the report, which strongly supported these changes when initially proposed, oppose efforts to undo these incentives that have helped to keep jobs in Massachusetts.

Michael J. Widmer is president of the Mass. Taxpayers Association.