JD Chesloff, head of the Massachusetts Business Roundtable, makes the rounds every summer, visiting his corporate members to hear what’s on their minds. One year, it was health care. Another year, transportation. During the COVID-19 pandemic, attracting talent became an even more pressing issue.
This past summer, though, one theme dominated all others: the state’s economic competitiveness.
Most of the roughly 90 mid- to large-sized employers in Chesloff’s group worry that it’s increasingly tough to attract and retain workers and companies in this notoriously expensive state, particularly with the rise of remote work. Chesloff points to widely cited census figures that show Massachusetts lost more people to other states in 2021 than anywhere but Illinois, California, and New York. For a state that relies on smart, talented workers to thrive, it seems we are at risk of losing our competitive edge.
This was the talk of the Roundtable’s annual meeting on Sept. 22. It also came up the following week at the Mass. High Technology Council, as participants discussed why we fell to 24th place in CNBC’s rankings of “top states for business.” One of the questions posed to US Representative Lori Trahan at the New England Council last week was about the state’s competitiveness. And when Julie Kim, head of US operations at drug maker Takeda, was asked at the Greater Boston Chamber of Commerce the other day about the future of work, what was her immediate response? To mention the region’s high cost of living as a barrier to recruiting talent.
So is it a coincidence that this fretting comes as an income tax surcharge on high earners heads to the voters?
Probably not. But Chesloff says the looming vote on the so-called millionaires tax, which his group opposes, is only a piece of the puzzle. Steep housing prices might be the biggest threat perceived by the business community. The costs of labor and energy are in the mix, too. While companies aren’t leaving in droves, many are choosing to expand elsewhere, while the widespread acceptance of remote work means many office employers can hire from just about anywhere in the country. As a result, the roundtable’s board decided its 2023-2024 public policy agenda needs to focus on improving the state’s competitiveness.
But even if taxes aren’t the only issue, they are the factor over which state legislators can exert the most control.
That’s why roundtable board chair Jane Steinmetz talked taxes when she spoke via Zoom at the recent Mass. High Tech meeting. We used to be known as “Taxachusetts,” Steinmetz reminded everyone, and we’ve tried really hard to overcome that reputation. But she worries about the individuals and businesses who can choose which state they call home and whether that old moniker still sticks in their minds.
Steinmetz, who leads the Boston office for accounting giant Ernst & Young, mentioned how Massachusetts has the most onerous estate tax in the nation. House and Senate leaders came close to fixing that as part of a broader tax reform agenda but could not reach an agreement on various economic development issues before time ran out on formal sessions for the year on Aug. 1. (There’s still some hope the estate tax, which kicks in for estates worth at least $1 million, gets modified during lightly attended informal sessions this fall.)
Steinmetz also referred to how corporate taxes in the state are based on three factors: the amount of sales generated in the state, as well as the property and payroll here. That approach can effectively penalize companies for adding employees or expanding facilities in Massachusetts. A growing number of states — more than 30 now — rely solely on in-state sales and not the other two factors, according to a recent tally by the business-backed Massachusetts Taxpayers Foundation.
There are some lucky exceptions: Manufacturers, defense contractors, and mutual fund companies have had this special tax treatment, known as the single sales factor, since the 1990s. But for everyone else, it’s all three factors.
Then there’s Question 1 — aka the Fair Share Amendment or the millionaires tax. Next month, voters will decide whether to add 4 percentage points, for earnings over $1 million, to the state’s flat 5 percent income tax; it would raise at least $1.3 billion a year for education and transportation. The pro-business Tax Foundation in Washington, D.C. — which typically ranks Massachusetts somewhere in the middle of the 50 states in terms of state tax burdens — said it could drop Massachusetts from 34th to 46th if voters approve Question 1. That’s in the cellar with the likes of New York, California, and New Jersey.
It’s this scenario that worries Jay Ash, head of the Massachusetts Competitive Partnership of high-powered chief executives.
Ash remembers working to lure General Electric to Boston from Connecticut six years ago, in his previous job as Governor Charlie Baker’s economic development secretary. He heard a lot of complaining from GE executives about the tax situation in Connecticut (currently 47th on the Tax Foundation’s list). A more appealing tax structure gave Massachusetts an advantage in the hunt for GE, an advantage Ash doesn’t want to lose. Ash said he has heard from several smaller companies in Western Massachusetts that will leave if Question 1 is passed, and a few of his group’s CEO members — including Patriots owner Robert Kraft and construction magnate John Fish — have helped bankroll the campaign against it.
Proponents of Question 1 disagree, saying the proceeds from the millionaires tax would in fact improve the state’s competitiveness. Campaign spokesman Steve Crawford said the Tax Foundation’s assessment ignores how chronic underfunding for the state’s highways, trains, and schools has hurt Massachusetts. Schools are unable to provide students with the skills essential to the state’s changing economy, he said, and traffic is as bad as ever.
But Ash counters that lower-cost states such as Florida and Texas — neither of which has a state income tax — are “cleaning the clocks” of the traditional economic hubs in California, New York, and, yes, Massachusetts. He worries policymakers here often fall into the trap of believing in “Massachusetts exceptionalism” — that our economy will always flourish thanks in part to our renowned universities such as Harvard and MIT.
Yes, Massachusetts still has much to offer: top-notch schools, a relatively high quality of life, great seafood, brainpower galore, a Dunkin’ on every corner. Are those factors enough to stay? Apparently not for everyone.