Thursday, October 6, 2016

Dear Phil Murphy, Massachusetts Doesn't Have High Taxes

Pop Quiz:

When it comes to Massachusetts, what do George H.W. Bush and Phil Murphy have in common?
  1. They were born there.
  2. They want voters to think that Massachusetts is a high-tax state.
Although both Bush and Murphy want you to think that the Bay State is "Taxachusetts," their motivations are different.  Bush unleashed the "Taxachusetts" goblin to scare voters away from Massachusetts governor Michael Dukakis.  Murphy presents "Taxachusetts," not as a bogeyman at all, but as a counterexample to those who say that NJ's high tax burden stifles business growth and intensifies outmigration.

Murphy uses the Massachusetts argument constantly in his town halls and interviews.  Here's one example of Murphy making this argument about Massachusetts taxes written-up by the Asbury Park Press:
“When General Electric made the decision to relocate to Boston -- believe me, I know this -- it wasn’t because their taxes were lower, it was because the infrastructure was better, the synergies with top-notch education and research facilities were exciting, and the quality of life was inviting,’’ Murphy said. “New Jersey can be that and more but we need leadership, vision, and a work plan that looks to the future.’’
Ok.  I'm not going to assess the accuracy of George H.W. Bush's claims about Massachusetts back in 1988 because what interests me is Massachusetts' taxes today and the inaccuracy of Murphy's claims.

GE HealthCare Had been in Piscataway until it
moved to Marlboro, Massachusetts.
First, Massachusetts' economic success is highly relevant to New Jersey, since it partly comes at the expense of New Jersey.

Many high-profile New Jersey biotech businesses have relocated there or expanded in Massachusetts.  Sanofi Aventis reduced its Bridgewater presence in favor of Cambridge (it has bought a company called Genzyme). Bristol-Meyers Squibb also moved from New Jersey to CambridgeGE moved GE Life Sciences from Piscataway to Marlborough, Massachusetts.  Other New Jersey pharmaceuticals companies like Johnson & Johnson, Novartis, and Pfizer have passed up opportunities to open new centers in New Jersey in favor of Massachusetts.

Moreover, the pace of new biotech business creation is faster in Massachusetts than New Jersey.

However, what Murphy is saying about Massachusetts taxes today is misleading because

MASSACHUSETTS IS NOT A HIGH TAX STATE (ANYMORE)

Taxachusetts is dead.

Liberalish Massachusetts people say so:

Despite the gripes and stereotypes, taxes in Massachusetts just aren’t that high. Not compared to other states, anyway.
Across New England, only New Hampshire has lower state and local taxes. And compared to the United States as a whole, Massachusetts taxes are below average.
Conservativish Massachusetts people say so too:

MASSACHUSETTS IS not, in fact, “Taxachusetts.” Rather, the Bay State is right in the middle, neither high nor low, imposing less of a burden on its citizens than certain other states filled with anti-tax braggadocio (ahem, that would be you, New Hampshire). But “Taxachusetts” is also less about reality than it is a state of mind. We may not tax heavily now, but we used to — and if certain folks had their druthers, we would once again.
The financial website WalletHub just released its ranking of the best and worst states to be a taxpayer. On top was Wyoming (with average annual taxes of $2,365) while Massachusetts ($6,884) came in at 21. Some states with greater tax burdens defy stereotypes. South Carolina, for example, was 23rd, Georgia 26th, and the aforementioned Granite State was 28th ($7,419).  [ed, New Jersey was 42nd in the WalletHub survey]

Using five taxes (Sales Tax, Corporate Income Tax, Property Tax, and Unemployment Insurance Tax) the Tax Foundation ranks Massachusetts in 27th place for best (ie, lowest) tax climate.  

New Jersey is ranked 50th place.  (LAST)


You can disagree with the Tax Foundation's claims about how central we should consider tax rates in what makes a state "business friendly."  You can quibble with the (admittedly subjective) methodology the Tax Foundation uses to develop tax rankings.  But the Tax Foundation does not lie about the underlying tax data and the facts say that Massachusetts' taxes are not high in relative terms.

When it comes to taxes, the comparison between Massachustts and New Jersey is devastating for the Garden State, especially for income taxes and property taxes.

Note: Massachusetts' income tax is a flat tax.  A New Jerseyan would have to make less than $35,000 a year to pay a lower income tax than a Massachusetts resident.
Massachusetts' unemployment insurance taxes are higher than NJ's, but it is a complex
comparison.

Low Property Taxes

Massachustts actually has the seventh highest median property taxes in the US (at $3,794) it's half of NJ's, which are the highest in the nation at $8,353, but the Massachusetts property tax rate is actually below the national average and way, way below New Jersey's.




Finally, taxes can be compared by looking at taxes as a percentage of the median person's income or overall state income.

If you look at an average person earning $50,000 a year, New Jersey's taxes are the second worst in the United States, after New York.  Massachusetts taxes are high, at the 10th worst, but again, they are lower than New Jersey's, Connecticut's, Rhode Island's, or Vermont's.

If you look at taxes as a percentage of total state income, New Jersey does a little better and is only the 10th worst.  Massachusetts' relative taxation actually drops to below average, to 10.12% of state income.   The national average is 10.35%.

So Phil Murphy's implication about GE's relocation to Boston disproves the notion that taxes hurt economic growth is an argument based on an outdated, false belief about Massachusetts.

Businesses that are attracted to Massachusetts probably don't have taxes as their primary motivation - or certainly not costs since housing prices and office and lab rents there are still high - but neither are taxes a deterrent and neither would as many businesses want to leave Massachusetts due to taxes as want to leave New Jersey (and Connecticut)

Murphy is Mostly Right about Education, Cities and the Massachusetts Economy

Phil Murphy has recently started talking about Massachusetts as a "high cost" state, not a "high tax" state," but there is a difference to businesses between a location being high-cost due to it being a premium business location or being high-cost due to taxes and regulation.  If a place is expensive because of demand, that means, by definition, it is thriving and demand is outpacing supply.  If businesses want to be somewhere, it must be due to the profit opportunities there being high, usually through some kind of networking or costumer access advantage.

On the other hand, if a place is expensive due to taxes, as New Jersey is, there is no such profit-premium that makes location there attractive.

Murphy is likely right about how Boston and Massachusetts' academic network are powerful creators of business and attractions to existing businesses.

Murphy said that he will also generate additional revenue in New Jersey by eliminating tax cuts for millionaires and closing loop-holes for corporations based in New Jersey. The candidate said that arguments that such changes encourage companies to flee the state are flawed. He supported that claim by citing GE’s move from New Jersey to the Boston, Mass. area, another high-cost region of the country. He said that the real reason businesses are fleeing New Jersey is the lack of cities that take advantage of things like proximity to New York and Philadelphia, lack of urban centers and transportation holes that leave much of the state disconnected. According to Murphy, if such issues are addressed in the state through investments to areas like Trenton, Newark and Camden, businesses will flock to N.J. despite lack of tax exemptions.
[Michael] Aron: You talk about the ecosystem. The business community has done a decent job of presenting the idea that we are taxed to the gills in New Jersey. That the business climate is not that attractive, and yet you’re a liberal and we think you want to maybe hike the gas tax, or ultimately the millionaire’s tax. How do you balance that?

Murphy: I think you can balance that. I think the argument that you’re one or the other is last century’s argument. I look at the decision for instance, Michael, that General Electric made to move their world headquarters to Boston. Now I know Boston. They didn’t go there because it’s cheaper to do business in Boston than it was where they were in Connecticut. They went there for the totality. For the all of those pieces of the puzzle. The communities in which their workers and customers want to live in. The infrastructure. The public schools. The emphasis on research and development and institutions of higher education. That whole nexus. And remember we were Silicon Valley, New Jersey was Silicon Valley, before Silicon Valley was Silicon Valley.
Again, I agree with some of what Murphy is saying, but what is missing from Murphy's version of events is that GE first began to threaten to leave Connecticut after Gov. Dannel Malloy floated in the summer of 2015 another $1.5 billion round of tax increases, including the imposition of Combined Reporting, so taxes were a push-factor in GE's departure from Connecticut.

Yet the urban-powered argument that Murphy makes is also incomplete because Massachusetts also has a large suburban pharma hub 30 miles west of Boston by I-495 around Marlborough where GE Healthcare, Boston Scientific, Quest Diagnostics, and Hologic plus many more are all located, so there is more to Massachusetts' success than Boston-coolness.

Murphy is right that GE could have relocated to a Sunbelt state even cheaper than Boston, so GE's final decision to relocate to Boston was perhaps primarily motivated by the educated, urban ecosystem.  However the GE-relocation cannot be used as fodder for the "taxes don't matter" argument that Murphy is making since the claim is based on a false premise of Massachusetts having high taxes

The Murphy Campaign Strategy:
Say Tech-y, Modern-Economy
Sounding Stuff,
Hope No One Realizes
It Doesn't Make Sense.
I suppose Hudson County could eventually become a thriving (if much smaller) city like Boston, but I do not think that New Jersey will ever match Massachusetts' academic milieu, nor do I think that Newark, Trenton, and Camden can substantially revive.

The Boston area has seven universities in the US News top fifty. (Harvard, MIT, Tufts, Boston College, Brandeis, Boston University, Northeastern)  

New Jersey has one, Princeton.

Moreover, the Boston-area universities are each much larger than Princeton.  Princeton has 8,100 students total.  Harvard has 29,000.  MIT has 11,330.  Tufts has 10,900.  Boston College 14,000.  Boston University has 32,600.  Northeastern has 19,800.  Only Brandeis is smaller than Princeton, with about 5,900 students. 

The top 50 US News ranking cutoff is arbitrary and Rutgers is a great university (it is ranked 70th), but still, New Jersey's universities cannot compete with the Boston-area's universities in the volume of research being done.

Massachusetts' academic advantages have been present for a long time, but that wasn't enough to make Massachusetts the nation's leader in biotech research.  Massachusetts began seriously investing public money in building a biotech industry in 2008.

The Newark Whole Foods is built thanks to
tax incentives to the developer and Panasonic
and the Prudential, who are located nearby.
The Whole Foods would be an attractor to
"creative class" professionals, but Phil
Murphy opposes tax incentives.
There is nothing wrong with New Jersey attempting to build its tech and biotech industries, but any governor should realize that we are disadvantaged relative to many other places and the factors that led to our becoming the "nation's medicine cabinet" and telecom research giant were historical accidents that are difficult to recreate.

But Murphy is at his most incoherent on urban policy.  Murphy says "if such issues are addressed in the state through investments to areas like Trenton, Newark and Camden, businesses will flock to N.J. despite lack of tax exemptions," but he opposes the tax exemptions that are the only things that induce businesses to locate in Trenton, Newark, and Camden as it is.

John Bury of Bury Pensions said it best about the Murphy strategy:

Present an idea that sounds good to anyone who won’t think about it in any depth to people who are not going to think about it in any depth.

And what about the rest of the New Jersey and People Who Don't Work in Tech?  

Murphy is right that state and local taxes often aren't always a major factor in location decisions, but it really depends on the industry and the specific business.  Goldman Sachs, despite making $7 billion in profit per year, has put thousands of employees in Utah because of Utah's low taxes and willingness to grant tax incentives that cut the low-taxes even more.

Moreover, there are scores of businesses in trade, services, or manufacturing that don't need a specialized workforce, have lower profit margins, and don't need to be near New York City.  For these businesses, let alone mom & pop businesses, taxes matter and New Jersey looks worse and worse.

The basic point here is this:

>New Jersey is a high-tax state.  Massachusetts is an average-tax state.

>>>Massachusetts hasn't become a major biotech hub just because it has moderate-taxes, but the moderate nature of Massachusetts' taxes means that taxes are not a deterrent to growth either.

>>>>>If you want to make an argument that a high-tax state can thrive, use an example other than Massachustts.



Source:
http://www.massbudget.org/report_window.php?loc=FactsTaxachusetts.html


---
December 2016 Update:

Connecticut's governor Dannel Malloy did admit that GE was concerned about Connecticut's unfunded pension system and the prospect of higher tax increases in the future.

The governor acknowledged that when he tried to convince General Electric officials to keep their headquarters in Connecticut, company leaders expressed concern over the rapidly escalating pension bill. 

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