Massachusetts v. New Hampshire

Stripped of stereotypes, a Mass.-N.H. business analysis reveals many ‘facts’ are pure fiction

By Jay Fitzgerald
Globe Correspondent / August 21, 2011

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A recent report by the Globe that New Hampshire is sending a consultant across the border to recruit Massachusetts companies sparked consternation here.

You know the story: Lumbering “Taxachusetts’’ - with high taxes and heavy regulatory burdens - had once again left itself vulnerable to economic poaching by its free-wheeling, lower-cost, faster-growing neighbor.

But an analysis of a variety of indicators shows that these stereotypes are often misleading, if not plain wrong. The Massachusetts business climate may not be as bad as commonly perceived, and New Hampshire’s is perhaps not as good.

Here’s a look at these perceptions, and how business conditions in Massachusetts stack up against those in New Hampshire and the rest of the nation.

Massachusetts is a high tax state. On a per-person basis, Massachusetts residents are among the highest-taxed in the nation. Including fees, each Massachusetts resident pays an average of $7,290 to state and local governments, the 10th highest in the nation. New Hampshire ranks 37th among states, with each resident paying an average of $5,436, according to the Federation of Tax Administrators, an association of state tax authorities.

But by another measure - one that economists view as an equally legitimate way to measure tax burdens - Massachusetts ranks among the lowest in the nation, 43d among states. Massachusetts residents pay about 15 percent of their income in state and local taxes and fees, below the national average of 16.4 percent.

New Hampshire does have the lowest personal tax burden in the nation, with residents paying an average of about 13 percent of income in taxes and fees, even though property taxes are nearly one-third higher per capita than in Massachusetts and about 70 percent higher than the US average.

However, even though New Hampshire has no sales or personal income taxes, the state is not tax-free for business. Companies pay an 8.5 percent tax on profits, plus a 0.75 percent enterprise tax on employers, based on total compensation paid to workers. The tax rate for most corporations in Massachusetts is 8.25 percent; banks pay 9.5 percent. These rates are scheduled to drop to 8 percent and 9 percent, respectively, on Jan 1.

Massachusetts is a far more costly place to do business than New Hampshire. Both Massachusetts and New Hampshire are cursed with high business costs, each ranking among the 10 most costly states in which to do business, according to Moody’s Analytics, a West Chester, Pa., forecasting firm. Massachusetts ranks first, New Hampshire seventh.

The main driver is labor. Both Massachusetts and New Hampshire have large numbers of highly skilled employees, who get paid more than average American workers, driving up employers’ labor costs.

New Hampshire has the fourth-highest median household income in the nation, at about $64,000, while Massachusetts has the eighth-highest, at more than $59,000 - or 20 percent above the US average of about $50,000, according to the US Census. In other words, high incomes are the result of high labor costs.

Massachusetts labor costs are pushed higher by tax and regulatory burdens on employers, such as higher unemployment insurance rates and health care expenses to help fund the state’s universal health-care law.

High electricity costs are a major disadvantage in Massachusetts. True. But electricity costs are even higher in New Hampshire, which has the fifth-highest electric rates in the country, averaging 14.7 cents per kilowatt hour, according to the US Energy Department. The average rate is 13.6 cents in Massachusetts, ninth-highest in the nation. The US average: 9.6 cents.

The high cost of energy is another factor pushing both states to the top of the cost-of-doing-business rankings.

New Hampshire has a faster-growing economy. Not lately. New Hampshire outperformed both Massachusetts and the nation as a whole in the previous decade, adding a modest number of jobs - 5,100 - between 2000 and 2010, while both the nation and Massachusetts were net job losers.

But coming out of the last recession, Massachusetts has experienced one of the nation’s strongest recoveries. In 2010, the Massachusetts economy grew more than 4 percent. That was the nation’s fourth-fastest growth rate, compared with 1.3 percent in New Hampshire and 2.9 percent nationally, according to the US Commerce Department.

In the first six months of this year, the Massachusetts economy created jobs at double the pace of both New Hampshire and the nation. Massachusetts added about 41,000 jobs, a 1.3 percent increase, compared with 0.6 percent job growth in both New Hampshire and the nation, according to the US Labor Department.

Today, Massachusetts and New Hampshire have substantially lower unemployment rates than the national average - 7.6 percent for the Bay State and 5.2 percent for the Granite State. The US rate was 9.1 percent.

New Hampshire’s gain is Massachusetts’ loss. New Hampshire relies on Massachusetts as a regional economic engine, built on universities, hospitals, and innovative corporations that thrive on the deep pool of skilled employees.

“There’s no doubt that what happens in New Hampshire depends on what happens in Massachusetts,’’ said Dennis Delay, an economist at the nonprofit New Hampshire Center for Public Policy Studies. “There is a connection, and it’s a strong connection.’’

But New Hampshire also contributes to the regional economy by offering a lower-cost alternative for employees and firms looking to reduce expenses and stay in New England, Delay said.

Ross Gittell, a University of New Hampshire business management professor, said it’s important to remember that economic activity doesn’t stop at state borders. Greater Boston and southern New Hampshire are part of the same regional economy; in fact, the US Census defines the Boston metropolitan area as extending all the way north to Manchester, N.H.

The two states’ often contrasting policies actually complement each other, allowing employees and employers to flow back and forth across the border while keeping dollars and jobs within the region, Gittell said. For example, nearly 100,000 New Hampshire residents work and file income taxes in Massachusetts. Their cross-border earnings and spending help support the economies of both states.

“It’s good for firms to have a choice between states in New England,’’ said Gittell. “It allows companies, if they so wish, to move to New Hampshire to save on costs, rather than moving jobs to South Carolina or elsewhere. This way, jobs are kept here in the immediate region.’’

So maybe Massachusetts shouldn’t worry too much about a New Hampshire business consultant crossing the border to recruit firms, economists said. Corporate poaching by non-New England consultants is a different matter, though.