Massachusetts over the past 16 years has more than doubled the amount of tax breaks it provides businesses to spur economic development but has only a vague idea whether the incentives are worthwhile, according to a new study by a Boston think tank.
The Massachusetts Budget and Policy Center found that the cost of the 58 “special business tax breaks” — covering everything from making movies to selling aircraft parts — has jumped to $770 million from $342 million in 1996. Unlike traditional spending items, such as grants or highway projects, tax breaks are generally not included in the state’s annual budget, so they don’t receive the same scrutiny as other programs.
“The tax credits need to be analyzed like any other state spending,” said Noah Berger, president of the nonprofit. “Is this the best way to spend our economic resources?”
The state Tax Expenditure Commission, a special committee charged with studying state tax breaks, recently concluded that Massachusetts probably has too many tax deductions, credits, and exclusions. It called on the state to review which ones are ineffective or unnecessary and modify them or eliminate them altogether. Neither the state commission nor the MassBudget report recommended any specific subsidies for elimination.
Overall, the state forgoes about $26 billion a year through tax exclusions, more than the $22 billion it collects in revenue.
Business groups say many of the tax incentives are needed to compete with other states, which offer their own incentives, and to offset the high cost of doing business in Massachusetts. The state corporate tax rate of 8 percent is slightly higher than the national average among states. Businesses also pay local property taxes, state sales taxes, unemployment insurance taxes, and an array of other fees.
Jim Klocke, executive vice president at the Greater Boston Chamber of Commerce, said the Legislature should lower tax rates across the board or expand incentives to lower the tax burden on companies.
“Businesses in Massachusetts pay very significant tax payments every year,” Klocke said. “Frankly, we need to find ways to make ourselves cost competitive that will strengthen our economy and will create more jobs.”
The MassBudget report did not examine whether the state needed the incentives to boost the state’s economy or compete with other states. But it found that special business tax breaks have grown much faster than the Massachusetts economy and state budget overall — highlighting the need to consider whether the incentives are cost-effective.
The report found nearly all the growth in the cost of the economic development incentives since 1996 has come from more than a dozen new subsidies, such as the film tax credit program and the so-called single sales factor tax breaks for mutual fund companies, defense companies, and manufacturers.
Under the film tax credit program, the state offers companies $1 in tax credits for every $4 they spend making movies, television series, or commercials. In 2011, for example, Columbia Pictures Industries received $11.6 million to film the movie “Here Comes the Boom” and a Los Angeles production firm received $9 million to make the movie “Ted.”
The film tax credit program has been particularly controversial because many economists say the economic activity it generates comes at too high a cost. The state Department of Revenue estimated it costs more than $142,000 per job for local residents.
Proponents, however, argue the program has helped bring a surge of feature films to the state, bolstering the economy and tourism.
Meanwhile, Raytheon Co., Fidelity Investments, and other companies with operations in multiple states successfully lobbied the Legislature nearly two decades ago to allow their industries to use the single sales factor method to calculate what percentage of their profits were subject to state corporate income taxes.
Previously, manufacturers, defense contractors, and mutual fund companies paid corporate taxes to Massachusetts based on the portion of their property, payroll, and sales they had in state. After the change, those companies began paying taxes based solely on the percent of sales from Massachusetts — saving the companies roughly $160 million a year.
Supporters of the single sales factor tax break said it makes it more attractive for companies to expand their payroll and operations in Massachusetts — particularly since many other states also offer the single sales factor break or have lower corporate income taxes. But critics argued the tax breaks haven’t kept firms like Fidelity from moving jobs out of state.
The report found that 57 percent of the economic incentives are earmarked for specific industries, such as the film tax credit, and 12 percent are awarded to specific companies. For instance, Liberty Mutual received $22.5 million in state tax credits to help build a new office tower near its Back Bay headquarters.