Proposed tax increases a concern for Mass. businesses
For much of the past several months, local businesses have had their eyes on Washington, as Congress and the Obama administration faced off in one showdown after another. But as federal officials lurch from fiscal cliffs to sequesters to debt ceilings, big issues with big stakes for Massachusetts businesses are being debated in the Legislature.
With the economy recovering and state finances stabilizing, many in the business community expected a relatively quiet session on Beacon Hill this year. But those expectations were dashed when Governor Deval Patrick proposed $1.9 billion in tax increases — including about $500 million in new corporate taxes — to help pay for education, transportation, and other state programs.
Those proposed increases — which have particular implications for the high tech, real estate, and retail industries — top the policy agenda for business advocacy groups. But they are far from the only issues that could have far-reaching effects on the Massachusetts business climate and economy.
Lawmakers will also decide how much to spend on the state’s aging transportation system and how to finance it; how to reconcile the state’s universal health care law with a similar federal law without boosting costs for thousands of small businesses here; and whether to overhaul the state’s unemployment insurance system.
Here are some of the issues that businesses groups are closely monitoring this session:
High tech tax blues. Of the governor’s proposed $500 million in new corporate taxes, more than half would come from applying the state sales tax to customized software and computer and data processing services, which are now exempt.
Tech firms say the tax would make their products less competitive at a time when global competition is fiercer than ever. They also say such a tax couldn’t come at worse time. Many firms do work for the Defense Department and other federal agencies, and their contracts could be cut or eliminated as automatic federal budget reductions know as the sequester go into effect.
“It’s a really bad idea,” said Chris Anderson, president of the Massachusetts High Technology Council, an industry group in Waltham. “This is not a good time to destabilize the [tech] business climate.”
Anderson added that taxing computer services could open the door to broaden the sales tax to a wide range of business and professional services, from accounting to consulting.
Home-sale capital gains taxes. Under state law, homeowners don’t have to pay taxes on the first $500,000 in capital gains that they realize from the sale of primary residences. The governor wants to eliminate that exemption to raise up to $285 million in new revenues, according to estimates by the Massachusetts Taxpayers Foundation, a business financed research group in Boston.
Rob Authier, chief executive of the Massachusetts Association of Realtors, said raising the capital gains taxes could discourage many people from putting their homes on the market, undermining the housing market when it has only recently begun to rebound from the collapse of the housing bubble several years ago.
There’s already a shortage of homes on the market, which is holding back the housing recovery, analysts say. “This proposal came as a real shocker to us,” said Authier.
The governor’s other proposals to eliminate a septic system repair credit (up to $15 million) and lead-paint removal credit ($3 million) could also add costs to buying a home and slow sales, Authier said.
Candy, soda, and tobacco. Patrick has proposed offsetting an increase in the state income tax to 6.25 percent from 5.25 percent by cutting the state sales tax to 4.5 percent from 6.25 percent. But Patrick would also apply the sales tax to sodas and candy, and raise taxes on tobacco products.
Those proposals have retailers divided.
Jon Hurst, president of the Retailers Association of Massachusetts, said larger retailers – such as electronics, appliance, and furniture stores — welcome an overall cut in the tax, which they say would make their products more competitive with retailers in nearby states.
But he noted that proposals could harm small grocers in border communities who must also compete against nearby retailers in other states, particularly New Hampshire.
“We have such a broad, diverse membership that different members have different attitudes toward the governor’s plans,” said Hurst.
Unemployment insurance overhaul. Massachusetts provides some of the most generous unemployment benefits in the country and businesses pay some of the highest unemployment insurance premiums.
For years, the business community has called for the Legislature to reduce some of those benefits to lower costs and make businesses here more competitive. And for years, lawmakers have resisted such changes, amid vehement opposition from organized labor.
House Speaker Robert DeLeo recently signaled that he’s open to some change in order to reduce costs to employers, although he didn’t provide details.
Business groups have subsequently proposed a number of changes, including reducing the number of weeks unemployed workers can collect benefits to 26 weeks from 30, which would bring Massachusetts’ rules in line with most other states. That and other changes could save employers, who now pay an average $745 a year per worker for unemployment insurance, as much as $260 million in one-time and annual savings, according to Associated Industries of Massachusetts, the state’s largest employers’ group.
A spokesman for the AFL-CIO of Massachusetts, the state’s largest labor organization, declined comment until specific proposals are unveiled by lawmakers.
Obamacare mandates. Federal regulators have served notice that they intend to implement new health insurance rules under the Patient Protection and Affordable Care Act, known as Obamacare.
But some of those rules clash with current state laws, including how insurers set premiums for small businesses and their workers, via rating factors such as the age of covered employees. Lora Pellegrini, president of the Massachusetts Association of Health Plans, said the net effect of the federal changes could be unspecified premium increases for many small business owners and the 640,000 employees their plans cover.
If federal regulators refuse to budge, there’s technically nothing that Massachusetts lawmakers can do to overrule those specific decisions. But if premiums rise as a result of Obamacare, political pressure could build on state lawmakers to eliminate some mandated services to lower costs.
Transportation improvements. There’s widespread consensus that the state needs to come up with more money to address operating deficits at the Massachusetts Bay Transportation Authority and pay for highway and other projects elsewhere in the state.
The Patrick administration has pegged the number at nearly $1 billion per year and proposed financing the work with the income tax increase.
But business groups and many lawmakers say if higher taxes are needed, the state should increase the gas tax, which is dedicated for transportation. The state’s gas tax, now 23.5 cents per gallon, hasn’t been raised since 1991.
The Massachusetts Taxpayers Foundation has proposed a 9-cent increase in the gas tax and an average $10 increase in various vehicle registration fees to raise $800 million per year for transportation projects by 2018.
John Regan, executive vice president at Associated Industries of Massachusetts, said his and other business groups tentatively support a gas tax increase. “But it can’t be a blank check,” he said. “We have to know where the money is going.”