Reining in Mass. High Business Costs

A new study has found that Mass. businesses still face high costs despite attempts at reform by Beacon Hill over the last decade.

The study looked at health care, workers' compensation, unemployment insurance, electricity and taxes.

Other costs that factor into business decisions that were not examined include housing, wages and the cost of regulatory compliance.

The study found that ten years ago, business costs in the Commonwealth were well above the national average in all five areas.

Since then, the gap has narrowed in each category. The most dramatic improvement was in workers' compensation costs, which are now below the national average. But Massachusetts businesses still pay more in the other four categories, particularly in comparison to other high technology states.

The Mass. Taxpayers Foundation, Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce conducted the study that was released in February, 2003.

Healthcare
After slow growth in the second half of the 1990's, health care costs are again increasing at double-digit rates in both Massachusetts and the country as a whole.

Family health care premiums remained higher in Massachusetts than any other tech state and third highest in the nation by the year 2000.

Only one other high tech state has higher single plan costs than Massachusetts, but the gap between Mass. and the nation is just 2.4 percent.

The situation is compounded by rapidly growing uncompensated care costs and low Medicaid reimbursement rates from federal and state governments.

Recommendation: The Commonwealth should not impose new mandated health care benefits, should not expand HMO liability or enact other laws that produce higher costs.
Policy makers should avoid shifting 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.

Reform the costly medical malpractice insurance system.

Commercial Electricity
Commercial electricity rates in Massachusetts were 25 percent above the national average, while industrial rates were 81 percent above the national average and fourth highest in the nation in 2000.

1997 utility deregulation has helped but it will take years for full benefits to unfold.
New, efficient generating plants scheduled to be built will increase supply. Rates should come down more as a competitive electricity market emerges.

In 2001, only 4 percent of all electricity used by Massachusetts businesses came from competitive sources; by 2002, that figure had risen to 34 percent.

Recommendation: Stay the course in restructuring and do not slow the progress toward lower electricity rates with sudden changes.

Unemployment Insurance
Despite a decline in the state's average cost for unemployment insurance over the past decade, it remains among the highest in the nation.

State policy perpetuates an inherent inequity. The rating system does not fully allocate costs toward firms that routinely lay off workers.

As a result, a majority of companies must subsidize heavy users of the system.
In 2002, the average cost per employee in Massachusetts was 70 percent higher than the national average and seventh highest in the country-this is actually an improvement over a 150 percent gap in 1992.

Recommendation: Systemic reform that will replenish the trust fund and allocate costs more equitably.

Ensure that employers who avoid laying off their employees are not required to subsidize chronic users of the system.

Workers Comp
The Commonwealth has improved significantly in this category. The system was on the verge of collapse in 1991.

Costs per $100 of payroll were 20 percent below national average in 2002 compared to 51 percent above in 1989.

Recommendation: No changes to the current system should be made without an independent and thorough cost/benefit analysis.

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: In an attempt to solve short-term fiscal problems, do not undo any tax reforms of key sectors that have improved the competitiveness of the Massachusetts economy.

“The Commonwealth has one of the heaviest personal income tax burdens in the country and higher than average corporate and property taxes.”

Make the three-percent "investment tax credit" permanent before it expires at the end of this calendar year. It is an important tool for encouraging investment and creating jobs, especially in the critically important manufacturing sector.

Competitor states compared to Massachusetts in the study include the large industrial states (Florida, Illinois, Michigan, New Jersey, New York, Ohio and Pennsylvania), so-called "high technology" states (California, Colorado, Maryland, Minnesota, North Carolina, Texas and Washington) and other New England States.

Manufacturing in Massachusetts took off after the Civil War.

By the turn of the century, about half the shoes and boots produced in the entire country came from factories in Worcester, Lynn, Brockton, Haverhill, Marlborough and other cities.

The state produced more than a third of the nation's woolen goods, while cities like Fall River, Lowell, Lawrence and New Bedford were leaders in producing cotton textiles.

Large plants were established to manufacture machinery of all kinds, employing thousands of workers.

Holyoke, with over two dozen paper mills, became known as the "Paper City of the World."
Raw materials were imported through the Port of Boston to feed our factories.

Industry continued to expand until the great Depression, when many decentralized away from cities and moved South, closer to the source of raw materials and cheaper labor.

Industry revived during World War II and expanded the economy to even higher levels. The military and aerospace industry seemed to be the economic future, but the winding down of the Vietnam War and cutbacks to the space program in the 70's brought decline and created a need for new markets.

Massachusetts enjoyed an economic boom in the 1980's, mostly in high-tech.

After another economic decline, the 90's saw the transition to the "New Economy," a blend of information technology, financial services, knowledge creation, health care, travel and tourism and traditional manufacturing.

Massachusetts is also hosting the newer industries of biotechnology, biomedicine, artificial intelligence, marine sciences and polymer technology.