How tax policy stunts growth in Massachusetts

LEE - Taxes are not the only factor in business- location decisions, but they are an important part of the calculus that companies consider when they decide where to establish themselves and grow.

That's why it is concerning that Massachusetts dropped from 34th to 46th in the 2024 State Tax Business Climate Index compiled by The Tax Foundation.

The ranking underscores the fact that the commonwealth still has work to do to make itself competitive for businesses and affordable for employees.

The index scores states across five sub-indexes, each representing a major component of state tax codes: corporate taxes, individual income taxes, sales and excise taxes, property and wealth taxes, and unemployment insurance taxes. Massachusetts ranked dead last on unemployment insurance taxes, 47th on property taxes, 44th on individual income taxes and 36th on corporate taxes for its overall rank of 46.

The 10 highest-ranked states for 2024 are Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, North Carolina and Indiana. The bottom 10 are Rhode Island, Hawaii, Vermont, Minnesota, Maryland, Massachusetts, Connecticut, California, New York and New Jersey.

The Tax Foundation is a non-partisan study organization that collects data and publishes research studies on U.S. tax policies at both the federal and state levels.

The ratings slide partly reflects the corrosive impact on the state's business reputation of the so-called "Millionaires' Tax" passed by voters in 2022. The surtax on incomes of more than $1 million (creating an effective rate of 9 percent) potentially harms some of the thousands of small and medium-sized Massachusetts businesses that pay individual income tax and form the backbone of the commonwealth's economy.

The national rankings were compiled before the Massachusetts Legislature passed, and Governor Maura Healey signed, a tax-relief package that includes a reduction in the short-term capital gains rate and a doubling of the threshold for the estate tax. Those changes will hopefully help Massachusetts improve its ranking for 2025, but the 2024 results remind us that the business community and elected officials still have a way to go to ensure that Massachusetts maintains a business climate that persuades both companies and talented workers to remain in the commonwealth.

A high tax burden is one of the factors driving many of those talented workers to leave Massachusetts for lower-cost areas of the country and exacerbating the labor shortage here in the commonwealth. Massachusetts residents paid the largest share in the nation of their income in taxes this year - residents filing as individuals paid 24.07 percent of their income to the tax man, while couples filing jointly paid 23.47 percent. The national average is 19.68 percent.

It's important to state that businesses understand the necessity of a well-structured tax code to fund the services upon which we all rely. Taxes pay for the roads that bring raw materials to our plants and finished products to markets around the world; for the police and fire services that protect property and lives; and for the education system that prepares residents to share in the economic success of our region.

The challenge is to efficiently meet the need for public services without choking off the economic growth that allows our neighbors to work, live and raise families. Tax policies affect economic decision-making on work, savings, inter-state migration, investment, and business organization. Every state can benefit from a simple, neutral, transparent, pro-growth tax structure.

What are the next steps that Massachusetts should take to make itself more attractive to businesses and workers alike?

Associated Industries of Massachusetts, where I serve as board chair, has three modest proposals:

• Create relief for small and family- owned business by reforming the so-called "Sting Tax." Currently, subchapterS corporations paying personal taxes are assessed an additional 1.93 percent on net income of gross receipts between $6 million and $9 million and an additional 2.9 percent on net income if recipes are $9 million or more. This system deeply disadvantages certain Massachusetts companies.

• Boost competitiveness by decoupling the Massachusetts tax code from federal limits on interest-expense deductions. Following passage of the Tax Cuts and Jobs Act of 2017, new rounds of corporate tax deduction limits were triggered Jan. 1, 2023. These limits weaken the incentive for companies to borrow and invest.

• Exempt rolling stock (trucks, trailers, railcars, most things involved in interstate commerce) in Massachusetts from the sales tax. This will counter a new state policy making rolling stock that enters Massachusetts for more than six days subject to the state's full 6.25 percent use tax regardless of where the property was purchased.

Taxes aren't everything, but Massachusetts cannot afford to be at the bottom of the heap when it comes to national rankings.

Patricia Begrowicz, the president of Onyx Specialty Papers in Lee, is chair of the board of directors of Associated Industries of Massachusetts.