Business costs found highest in Hub

Boston has surpassed New York as the most costly metropolitan area in which to do business, primarily due to the highest labor costs in the nation, according to a study. Massachusetts had the highest cost of doing business among states.

Boston's business costs were 36 percent above the national average, and Massachusetts' were 25 percent higher than the average in 2003, according to the annual analysis of business costs by Economy.com, a West Chester, Pa., forecasting firm.

Massachusetts also had the nation's highest business costs in 2002.

''The area has high living costs, and because of that it has high wages," said Gus Faucher, senior economist at Economy.com. ''There's no question that high costs are a strong deterrent to locate in Boston and Massachusetts."

Economy.com's latest analysis of business costs comes as economic competitiveness has re-emerged as a key political issue, following a deep recession that cost the state more than 200,000 jobs. Governor Mitt Romney, criticized by political opponents for his handling of the economy, has proposed a $600 million stimulus package that includes initiatives to lower corporate costs, including a $246 million cut in unemployment insurance taxes paid by business, and tens of millions of dollars in incentives for businesses that create jobs.

But the Economy.com analysis shows that such initiatives are likely to have little impact on the state's overall business costs. Massachusetts and Boston have the nation's highest business costs because they also have the nation's highest labor costs, which account for most of business' total expenses, according to the firm.

Massachusetts and Boston's labor costs were 25 and 36 percent above the national average, respectively in 2003, according to Economy.com. Also contributing are commercial energy costs that were 44 percent above the national average in Massachusetts and 72 percent above in Boston.

In contrast, state and local tax costs were below the national average, with Massachusetts 38th among states and Boston 194th of about 350 metropolitan areas.

Noah Berger, the executive director of the Massachusetts Budget and Policy Center, a public policy think tank, said the analysis shows that corporate tax breaks, typically touted as necessary to boost competitiveness, actually have little impact on the state's business costs.

''What makes a place competitive are the things that states can provide like an educated and skilled workforce, good public infrastructure, and safe communities," Berger said. ''When you slash corporate income taxes, it undermines the ability to pay for the kind of services on which a strong economy depends."

Joseph Donovan, spokesman for the state Executive Office of Economic Development, said the tax incentives included in Romney's proposal are needed to compete with other states, which have large incentive funds to entice businesses. He added that Romney has proposed a variety of other initiatives, such as healthcare reform and streamlined permitting process, which would additionally lower business costs.

Donovan added that labor costs are high because of a highly skilled, well-educated workforce that commands higher salaries.

Meredith Baumann, spokeswoman for the Boston Redevelopment Authority, said the region's high housing costs undoubtedly contribute to high labor costs, since employers have to pay higher salaries to attract and keep employees. She said the BRA and administration of Mayor Thomas M. Menino are working to create more affordable housing.

''This study obviously shows that the Northeast has high costs," she said. ''But we think there is still a significant return for businesses in Boston, including the quality of our workforce and access to world-class institutions and brain power."

In its analysis, Economy.com gives most weight to labor costs, which include wages and salaries. Labor costs represent at least 65 percent of its cost-of-doing-business indexes. Energy accounts for 15 percent, and taxes 10 percent.

Jim Klocke, the executive vice president of the Greater Boston Chamber of Commerce, said he believes Economy.com gives too much weight to labor costs, and doesn't accurately measure competitiveness.

''Our labor costs are a signal we have a highly educated workforce," Klocke said. ''The business costs that reflect competitiveness are the ones set or heavily influenced by government, such as taxes or workers' compensation, and we disagree that we have the highest business costs."

Among regions, the Northeast had the highest business costs, with only two states, New Hampshire and Rhode Island, having costs below the national average. The West had the second highest costs, the South, the lowest. Among states, California ranked second to Massachusetts, followed by Hawaii, New Jersey, and Washington, D.C. New Mexico had the lowest costs.

Of the top 10 most costly metropolitan areas, Boston and New York were the only ones not located in California. San Diego had the second highest costs, followed by Los Angeles and Sacramento. New York ranked fifth, San Francisco seventh. Energy costs in California spiked a few years ago when it deregulated its electricity market. Electricity costs were higher than Massachusetts, more than 60 percent above the national average. San Diego's energy costs were more than double the national average.

Robert Gavin can be reached at rgavin@globe.com.