Business climate will suffer with rise in tax burden
POLITICIANS, PAUL Tsongas used to warn, too often treat the business sector as though it's an ATM machine, tapping it constantly for cash without worrying about replenishing the account.
That's a pretty fair description of what's been happening here in the last few years.
Mitt Romney started it, closing so-called loopholes that raised the business income tax about $400 million a year. Now Governor Patrick is proposing changes that would increase that tax burden by another $500 million a year.
Danger, warns the Greater Boston Chamber of Commerce: Together, those increases would amount to an 80 percent increase in the corporate income tax burden in four years.
No fair, retorts the new administration: If Patrick's proposals are divorced from Romney's and considered as a share of overall state business taxes, all of his changes amount to an increase of less than 4 percent.
That calculation, however, disguises what's economically most relevant: The total half-decade increase businesses will bear if Patrick's revenue-raising measures are piled atop Romney's.
Other business levies have been rising, too. Back in 2004, unemployment insurance levies went up another $600 million per year.
Last year's new healthcare law added another $30 million. And Patrick hopes to revisit the balance between business and residential property taxes in a way that would keep business's share higher than it would otherwise be.
There's a tendency among some to see the private sector as a rich (and selfish) realm that can be taxed with little consequence. Certainly the governor has presented his tax changes as mere loophole closings that should have no ill effects. But basic economics tells you that an increase in the business tax burden has to be felt in one or more of the following ways: The price of products and services will rise, or there will be less money for wage increases, or profits will fall.
"The idea that you can take $500 million out of wages, profits, and consumers and there will be no negative consequences to the state is pure fantasy," says David Tuerck, executive director of the Beacon Hill Institute, Suffolk University's market-oriented think-tank.
Increasing prices or restraining wages means the greater corporate taxes would basically be borne by consumers or workers.
The prospect of reduced profits, meanwhile, can't help but hurt the state's business climate.
"If I was trying to attract business and create more employment, I would not reach to increase taxes on business," says Roger Porter, professor of business and government at Harvard's Kennedy School. "It is not only that business might not locate a lot of new activity here, it is that they will say, 'We will cut our losses and move some out.' "
Either effect would obviously hurt in a state where the recovery has been so sluggish that total employment still hasn't climbed back to its 2001 level, and where our total job growth over the last four years has been an anemic one percent, among the nation's worst.
Patrick's plan has touched off a debate of dueling studies about whether business taxes here are actually burdensome.
In his public presentations last week, the governor cited a report by the accounting firm Ernst & Young saying that as a percentage of the economy, our state and local business taxes rank only 47th in the country .
Those, however, are old numbers. A February 2007 report by the same firm, released on the very day Patrick unveiled his budget, shows that we have actually jumped seven places, to 40th.
However, the better business-climate metric is not tax burden but total business costs. And make no mistake, ours are high.
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"Clearly the state's business cost structure is an impediment to growth," says chief economist Mark Zandi.
As he tries to deliver on his campaign promises in tight times, Patrick has avoided some tough measures that could bring about important savings for the state, municipalities, and businesses -- things like pursuing competitive service delivery, requiring, rather than simply allowing, localities to join the state's Group Insurance Commission to provide employee healthcare, and reforming our overly generous (and correspondingly expensive) unemployment-insurance program.
Instead, he sees more business tax revenue as the pot of gold at the end of the rainbow. But policy makers would do better to view business as the goose that lays the golden egg -- and to worry about the health of a wealth-incubating fowl that's already suffering from a severe case of the flu.
Scot Lehigh's e-mail address is lehigh@globe.com. 
