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Does Massachusetts Hate Business?

CEO magazine says yes, BU entrepreneur says it’s a bum rap

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Boston University BU, Office of Technology Development OTD, Vinit Nijhawan, Massachusetts businesses, taxachusetts high taxes in Massachusetts for business

Vinit Nijhawan pooh-poohs a magazine's charge that Massachusetts is a bad place for business. Photo by Kalman Zabarsky

It’s That ’70s Show time at Chief Executive magazine. A generation after Massachusetts was dubbed “Taxachusetts” for its putative hostility to business, the charge has been resurrected in the magazine via its latest state rankings, determined by a survey responded to by 736 CEOs. The commonwealth was rated 47th among states for the warmth of its business climate, slightly better than New York, Illinois, and dead-last California. Texas won the best-of designation.

“If I were designing Hell for a company, I couldn’t do as good a job as Massachusetts has,” one anonymous CEO told the magazine. Another groused that the company was moving operations out of Massachusetts and three other states and firing employees there, as “the regulatory and tax environment has become untenable.” The magazine itself slammed Governor Deval Patrick’s plans to raise income taxes and eliminate corporate deductions (coupled with a cut in the sales tax), proposals that legislators may scale back.

We ran the matter by Vinit Nijhawan, managing director of BU’s office of Technology Development and a School of Management lecturer. He has started or served on the boards of about a dozen technology companies since coming to Massachusetts from Canada a quarter century ago. “The biggest one grew to 400 people worldwide,” he says, “and it had about $60 million in sales.”

BU Today: California and Massachusetts are hubs for technology companies. If they’re so awful for business, why would CEOs cluster in those states?

Nijhawan: It’s really clear why: because a lot more emphasis is placed in those states on human capital and lifestyle. If you’re starting a technology company, you have enormous access to technology and people in those places, more than anywhere else. That suggests that the CEOs they interviewed were from bigger companies, especially companies in low-margin commodity markets, like retail. There, the difference between having a 6 percent state sales tax versus a 3 percent tax probably makes a difference to your bottom line, because your margins are thin.

But retail’s very complex, because your outlets could be all over the country. Your income gets taxed differently if you’re here, so who gets affected? Basically, in-state shareholders and management. In the past 30 years, CEO salaries have increased dramatically. So I could see CEOs getting a big personal hit if they were here, versus, say, New Hampshire, which has no sales or income tax. But people aren’t going to move out of Massachusetts to Texas because of sales or income tax.

So from your perspective, is Massachusetts a lousy place to do business?

If you’re going to start a technology company, this is a great place. I would say 95 percent of the CEOs with a start-up here would agree. If you’re established, big firms, I still think this is a great place, because you’re dependent on a highly educated workforce. And we’ve got the best-trained workforce in the country, by all measures. Even our primary K-12 school system is superior to most other parts of the country.

The significant retailers we have here are TJ Maxx and Dunkin’ Brands, including Dunkin’ Donuts and Baskin-Robbins; Panera Bread is headquartered here; Boston Market is headquartered here. Why wouldn’t they move their headquarters to New Hampshire? It’s just up the street. Increasingly, almost all business, even manufacturing, is requiring a higher-educated workforce. A lot of blue-collar businesses have moved to other parts of the world.

You’re skeptical about this Chief Executive article?

I am pretty skeptical. Most CEOs inside I-95 would say, let’s spend money on transportation infrastructure, which Governor Patrick wants to do. It’s going to allow the productivity of their employees to go up. Even the technology industry has expanded out to the suburbs; I took one of my companies from Cambridge to Billerica when it grew too big.

I wonder if the CEOs they quoted were unhappy with Romneycare, the state’s universal access health care law?

It does give more—I don’t like using the word “power,” but “flexibility”—to employees. If you’re not tied to your employer because of health care, you can move to another job. It does help labor mobility.

Is that something that CEOs think about?

Think about, yeah. Retention is important.

Was the “Taxachusetts” rap fair 25 years ago, and are things different now?

Yeah, phenomenally. To understand Boston, one of my company cofounders said, you’ve got to read this book, Common Ground. It tells you how the place ran. It was cronyism to its nth degree in Boston. We went to look at some houses in Dorchester, and I said, “This is really bizarre, none of these houses have a for-sale sign in front of them.” The realtor said, “People just don’t want the wrong kind of people living here.” This was unheard of where I came from in Canada. It’s nothing like that now.

So the problem back then was crony capitalism?

Fundamentally. In most parts of the world, it’s not the laws that are the issue; it’s how they’re implemented. I think this place is quite centrist, and it doesn’t overreach to the left. I really don’t think taxes and regulation are the heart of the issue. I think the heart is how well does the place run. Starting with Michael Dukakis, we’ve had a run of really professional governors, both Democratic and Republican.

You want the trains to run on time. You want an educated workforce. Do you need regulation and government for that outcome? And the answer is yes.

13 Comments
Rich Barlow

Rich Barlow can be reached at barlowr@bu.edu.

13 Comments on Does Massachusetts Hate Business?

  • Nonsense on 06.19.2013 at 5:36 am

    The regulatory and tax environment in MA is terrible and this attempt to sell it as anything less than it is really nonsensical. The reason tech companies start out here is because of the numbers of schools which in turn increases the number of people with patentable biotechnology ideas that can be morphed into a business. These same young people are then aided by established area venture capital firms through university tech transfer programs etc. and since this is what they know and where they are day one this is where they “conveniently” open their doors. The reason these companies stay here is not because the cost to bottom line is good but because of the brain drain they would experience by leaving the area. This does not mean they really “want” to be here. Likewise potential employees stay here because they too are trapped by the job prospects not because they “want to” be here either. On the contrary if MA was more friendly toward people like me I would start a small tech in my garage tomorrow! MA politicians need to wake up. If you think MA is a good place for tech now when it truth it is a terrible regulatory and tax environment just imagine what it could be if that environment were improved! We would have many more tech startups here if the taxation and regulation were both reduced. But since MA has the advantage of being to hub of the education system it gets way with having higher taxes and more regulation and then says hey look we are still a good place to do business because we can get way with it. This is pure nonsense. The policies in this state are strangling the goose that lays the golden eggs nevertheless and need to be improved period.

    • Sofia on 06.19.2013 at 10:36 am

      In other words, MA has a great business model. It’s a leader in education and technology firms, and it invests in quality of living and human capital. It is one of he few places in the country that has a significant middle class. That is why it has one of he lower unemployment rates and is still able to provide services for the poor at better levels than other states (though that is getting tougher and tougher). So far it has worked it seems. Just compare our economy to those of other states.

      • Kris B. on 06.19.2013 at 12:10 pm

        Ok let’s look at this “great business model.” Massachusetts has one side of the equation going for it: an educated and relatively young workforce. The rest is not so wonderful as you try to make it. Massachusetts has a higher unemployment rate than 16 other states, 11 of which have a lower overall tax burden (business and individual). It falls behind Virginia when comparing unemoyment rates, and Virginia is constantly seeing an influx of businesses and their headquarter operations. Why? Because that state has a well educated, young workforce in the northern, central, and southeastern parts of the state, all with a friendlier business environment that has consistently ranked in the top three in the nation for the last decade.

        And Massachusetts doesn’t exactly represent a well run government or stable economy, with unemoyment actually on the rise while it has declined in other states. Lastly, MA has not had its fiscal house in order for some time, still struggling to get past a middle of the pack bond rating that lags far behind states like Virginia.

        While the person interviewed for this article is apparently a successful businessman, it is laughable and disingenuous for the author or Mr. Nijhawan to suggest that the regulation and tax environment in Mass is not seen as a negative by businesses. I even have to question Mr. Nijhawan’s understanding of basic economics or taxation as it relates to business operations, as he thinks that sales tax directly impacts margins. If an item is $100 in Mass, plus $6.25 in sales tax, then the business profit margin is still the same when they charge $100 for that same item in Delaware, where there is no sales tax. Sales tax is added on to the cost for the consumer, not the seller.

        I won’t even go into the problem with the proposal to increase income tax and lower sales tax…

      • Nonsense on 06.19.2013 at 12:25 pm

        You have just shown that you do not know what you are talking about because according to the Bureau of Labor Statistics the unemployment rate in Massachusetts is higher than that of New Hampshire.

        http://www.bls.gov/lau/stalt.htm

        • Kris B. on 06.19.2013 at 12:41 pm

          Nonsense, are you referring to my post or to Sophia’s, because I never mention New Hampshire in mine?

          • Nonsense on 06.19.2013 at 4:39 pm

            Yes I am replying to Sophia

  • Kris B. on 06.19.2013 at 6:35 am

    Wow what a stretch. To go from cronyism in the form of housing discrimination, and twist that into crony capitalism is just absurd. If anything the scenario he described involving the house in Dorchester is just an example of how Massachusetts is not so transcendent of race and discrimination as people would have outsiders believe.

    More to the point, this article is leading in its questions and vague in actually answering the original question posed. Massachusetts should be ranked higher in terms of its business environment and how positive it actually is for businesses that choose to locate or establish a headquarters here. California, by contrast, has a comparatively oppressive regulatory and tax structure.

    California remains the headquarters location for so many technology companies due to the proximity of their technology base,specifically Silicon Valley,and the businesses that have been there and established facilities over the past few decades. At this time the cost-benefit analysis doesn’t make it feasible for these businesses to simply up and move to a much more friendly tax and regulatory state such as Nevada or almost anywhere else in the country… It’s simply cheaper right now for them to just stay where they are in deal with the hand that they’ve been dealt.

    In response to the question posed within a question, “why don’t these business headquarters simply pack up and move to New Hampshire?”: The answer that has nothing to do with the regulatory or tax structure between New Hampshire and Massachusetts, it’s a matter of logistics personnel and overall environment. New Hampshire doesn’t offer near the level of transportation infrastructure or personnel base, particularly educated personnel.

    That doesn’t include a comparative look at the corporate tax rates and the cost of real estate and other property taxes that may create an even greater burden for the business if they were located in New Hampshire. This article specifically avoids other taxes that have a greater impact on business operation, not individual sales taxes or individual income taxes. Corporate tax rates and regulations related to the type of operations conducted by that business Have far more to do with a business’ decision on where they will start or locate then how much an individual employee is going to pay out in income tax.

  • Dennis Byron on 06.19.2013 at 10:43 am

    Kris B and Nonsense

    You are actually giving the writer of this article too much credit. The whole idea that a good source concerning “What’s wrong with Massachusetts from a CEO’s perspective?” would be a college lecturer is only the beginning of this article’s problems.

    Then the author pretends that over 100 technology manufacturers (rough estimate) have abandoned Massachusetts in the last three decades, in terms of places to grow employment. And although some go to SV, their big growth came in Austin and RTP (and India and Ireland of course even more so).

    The lecturer’s comments about retail are just plain weird and contradictory. You have retail where you have people, pretty much in proportion to the size of the population. Maybe he means Walmart doesn’t headquarter here but that would certainly have nothing to do with sales taxes (nor is there any particular tie between individual-state sales taxes and a retailer’s margins; I can think of a weak one — eg Mass vs. NH — but that doesn’t hurt Walmart or Macy’s or Dunkin or Panera; they do business in both places) or even have that much to do with corporate income taxes.

    And the ending is priceless. He basically says in Boston (not sure if he means the city itself or the state government but since there is very few businesses literally based in Boston I assume he means the state?), it used to be not what you knew but who you knew. But now — with the “professionalism” in state government — all we have is something like five or six House Speakers in a row run out of office because of misconduct, ditto for a Lt. Governor and a few backbench state reps and Senators, a Welfare program that pays the dead, a healthcare insurance reform program that met none of its objectives and that was effectively repealed in 2012, and so forth

  • cletus van damme on 06.19.2013 at 10:48 am

    Everyone complains about Massachusetts aka “Taxachusetts”, however, as a resident of Connecticut, I have found that Mass is great in all aspects. Lower unemployment, (25 years of no job growth in CT), lower taxes, lower gas tax (gas is 30 cents cheaper in Mass compared to CT), a fluctuating civilian labour force rather than a massive tapering off of that figure in CT. Boston, a major city that has stayed competitive, relevant, clean and beautiful through out the years, vs Hartford, a city that has become run down and a haven for gang violence and empty buildings.

    There is a reason I commute to BU from CT. I learned my lesson; if I want a job, I have to go where the jobs are present. There are no jobs, and when I say no, I mean zero jobs in CT.

    • Nonsense on 06.19.2013 at 12:28 pm

      CT’s economic problems stem from the end of the cold war era. You see there was a time about 25 years ago when the majority of jobs in CT were related to defense contracts.

  • Howard I. Cohen on 06.19.2013 at 7:39 pm

    I’m surprised and a bit taken aback by the vigor and extremes of people’s reactions. Some of it reads like the state legislators huddle in secret and look for ways to make a CEO unhappy. Like by increases his or her taxes. Also by imposing trashy regulations, like insisting that companies clean up their waste. One item – taxing – is not acceptable, and the other item, regulation, only is bad if it inconveniences YOU.

    As for taxes, I believe that the greater number of legislators have to walk a very narrow line between not imposing taxes – on industry (where it is okay to tax the rest of us – consumers!!) and giving the consumer as much spending power as possible. (i.e.taxing tax the non-consumer, like a business.)Remember, politics is the art of compromise. I would be terribly distressed if we were at one extreme or the other regarding corporate, sales, or personal income. So we sit somewhere a bit more toward one than the other. Not an ideal balance, but indications of a reasonable balance.

    As far as taxation on start-ups, high tech or low tech, and I speak from experience, with a good accountant you can deduct just about every conceivable business expense, from rent to payroll, to material and equipment purchases, to advertising and other sales expenses, even holiday parties and bonuses, which have to be declared as taxable income by the recipient. In fsact, the opposite is often the problem. If a successful start-up doesn’t show a profit, which is taxable, that company may not look good to a possible investor. Fortunately must investors are wise enough to know that the well run start-up will not show much, if any, profit. They will spend it to do more R&D or promote more sales, or bigger plant or more production (or research) machinery, etc., etc. every penny of which is deductible, i.e. not taxable. Unless, of course, you’re depreciating. But that’s another story.

    The simple truth is that the need for lower taxes is to permit a company to spend non-deductible money. You list those items. When a company gets big enough, it can go public. Then we play a “Capital Gains” game. Remember, the Congress lowered the Cap Gain to 15%, throughout the country, not just in Mass. or Texas.

    And we could have a meaningful discussion about what the Commonwealth uses its tax revenues for. Here is a numbing statistic. Over 500 bridges in the state have been determined to be badly in need of repair. An ongoing program has brought up to standard only 70 bridges. If I were a high-tech CEO and let my lab instruments deteriorate that way, or my production machinery, the board would fire me. Where is the CEO recognizing that his or her goods, people, et al., have to use those bridges to function, and therefore says “I’ll pay my fair share?”

    So my issue is not one side or the other, but simply noting that it is a many sided issue with a lot of tug and pull. But that’s the effort that, hopefully, strikes a balance.

    BTW – I understand that the drinking water in Texas is terrible. Nobody wants to pay for purification plants and no one wants to ‘burden’ the CEO with regulations that say “don’t pollute.”

    Think about it.

    Howard

    • Nonsense on 06.25.2013 at 2:43 pm

      And tell me who in the Back Bay is drinking the tap water? We know they are all drinking the Kool Aid!

  • Flaming Liberal on 09.02.2013 at 3:57 pm

    Only the government is able to provide for us, nurture us, protect us, and is the only one who knows best what to do with the money we earn for them. In Massachusetts, we hold this is the highest regard.

    We are unified in the sense that we love our taxes and to calls the state “Taxachusetts” is unwarranted.

    I know I speak for everyone when I say I am very disheartened that Gov Patrick’s original budget proposal was neutered. Although, we should never have a decrease in the sales tax. I would have preferred an increase in the sales tax to 7.25%, income tax to 6.25%, gas tax by $0.25, increase registration/inspection/license plate and license fees.

    The residents of MA are swimming up to their neck in a glut of excess cash, which, should be directed to the state for proper usage.

    I am proud to live in MA. We all should be and unquestionably follow our dear, cherished, leaders.

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