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High Costs, Prospective Tax Hikes Cloud Massachusetts' Billion-Dollar Biotech Plan

NEWTON, MASS. — Massachusetts’ sluggish economy and the prospect of a proposed corporate tax hike and other tax increases would pose serious long-term hurdles to the state’s plans to boost biotechnology subsidies, according to a group that studies state spending and tax policies.
The state can likely afford the 10-year, $1 billion Life Sciences Initiative proposed by Gov. Deval Patrick [BioRegion News, May 14] since the annual $100 million expense would account for 0.3 percent of the state’s $29 billion budget now under discussion, Michael Widmer, president of the Massachusetts Taxpayers Foundation, said in an interview.
But the additional biotech economic activity expected through the subsidies, Widmer added, would be reduced if Massachusetts moves to raise corporate taxes as is being considered by a panel whose members represent Patrick, Massachusetts House of Representatives Speaker Salvatore DiMasi (D-Boston), and state Senate President Therese Murray (D-Plymouth).
“It will certainly undercut the business climate in this state,” Widmer said. “Our businesses already face a competitive disadvantage. Adding to that disadvantage, certainly when you increase taxes on corporations in a major way, is not lost on employers from out of state.”
The 15-member Special Tax Commission has proposed requiring Massachusetts companies to use a single filing status for both their federal and state tax returns, what officials call “check the box.” The proposal is expected to generate $100 million in new tax revenues for the state in the 2008 fiscal year, which began July 1, and $170 million a year in future fiscal years.
On June 12, a divided commission voted 8-7 to recommend “check-the-box” be approved by the legislature, making it likely it will be among the tax commission’s recommendations. The close vote reflected coolness to the idea from legislative leaders, who sought more discussion. Those leaders in recent months have publicly expressed support for the biotech initiative — and for containing business taxes.
“We should not move forward on this [recommendation] given that it does not reflect the comprehensive review that we all agreed to when we started this commission,” Dave Guarino, a DiMasi spokesman, said in an interview early last month.
Not so, insists Massachusetts’ top economic development official. Speaking to BioRegion News minutes before he was to address the annual conference of a statewide economic group, Daniel O’Connell contended “check the box” would close a loophole used by corporations to siphon off tax money he and Patrick argue rightly belongs to the state.
He said Massachusetts was right to align its tax policy with those of states that already require a single filing status for corporate taxes — a position echoed by two policy research groups supportive of check-the-box, the Massachusetts Public Interest Research Group and the Massachusetts Budget and Policy Center.
Mathew Helman, MBPC communications director, cited a study by his group showing employment growth of 27.2 percent between 1990 and 2006 in the 16 states requiring check-the-box, compared with 22.8 percent in the remaining multiple-status states: “Having combined reporting is not apparently an impediment to economic growth.”
O’Connell also cited studies concluding Massachusetts’ tax burden was lower than more than half the states in the nation. The Tax Foundation ranked the state’s tax burden 36th, while an Ernst & Young report for the Council on State Taxation in Washington, DC, ranked Massachusetts 42nd in the percentage of state and local taxes paid.
“We think we have a very favorable tax climate and business climate. We don’t think [check the box] will have any negative impact,” said O’Connell, Massachusetts secretary of housing and economic development.
O’Connell and Widmer were among five professionals who discussed the state of the state’s economy at “Playing to Win: Massachusetts’ Place in the Competitive Landscape,” the panel topic at the 14th annual conference of the Massachusetts Alliance for Economic Development, held at the Boston Marriott Newton hotel June 22.
The conference came as aides to Patrick, DiMasi, and Murray began hashing out a compromise state budget for FY 2008. Those discussions were continuing at deadline; spokesmen for Murray and DiMasi last week did not return messages from BioRegion News seeking an update on the talks.
One topic of discussion by the officials: How much in surplus should be used toward the FY 2008 budget. Patrick submitted his $29.2 billion spending plan to lawmakers in January, warning that the state would need to plug a budget gap he projected at more than a billion dollars. To that end, the governor proposed ending the state’s century-old property-tax exemption on telecom equipment. Patrick also spent part of the spring urging legislative leaders to cerate a new tax of up to 2 percent on hotel and restaurant bills, with local communities required to use at least one-quarter of the proceeds to lower their property tax levies.
But stronger-than-expected capital gains tax collections due to the Boston region’s strong commercial real estate market left the state $250 million ahead of projections coming into June.  The surplus has allowed officials to consider using all or part of it toward the Life Science Initiative and other programs funded within the FY 2008 budget.
The ultimate size of the surplus will depend on June tax collections, which had not been calculated at deadline.
“If I had to hazard a guess at this point in time, I’d probably put [the fiscal year 2007 surplus] at around $200 million. But that’s a very rough estimate,” Widmer said in the interview.
Jim Stergios, executive director of the Boston-based free-market think tank Pioneer Institute, said the state runs the risk of repeating mistakes it made in the 1990s. Back then, the state steered incentives to the information technology and financial services industries, with some job-attraction successes before the tech industry fizzled in 2000 and financial firms moved to lower-cost states.
“Tax breaks can work, but only for a short period of time,” Stergios said. “You can spend a billion dollars. It may have some impact over a short period of time. But over the long term, to retain and sustain expansion, the chalice, if you will, the state should be chasing after, is a good basic business climate.”
He said Bristol-Myers Squibb chose Devens, Mass., for its $750 million, 400,000-square-foot biologics-manufacturing plant now under construction less because of $60 million in incentives than because the state and local governments approved permits in less than six months: “We were able to counter the view out there that Massachusetts is inhospitable to business.”
Shire Pharmaceuticals appears to be the next pharma giant in line for an expansion, and the state incentives that go with it. Shire has submitted plans to local officials for a $394 million expansion at Lexington [Mass.] Technology Park consisting of 370,000 square feet in two buildings.
O’Connell told conference attendees the state was in ongoing talks with Shire for incentives. While he declined to discuss details, Shire has promised to create 680 new full-time jobs by 2015, as well as keeping 550 existing full-time jobs now based in Cambridge, Mass.
During the conference, O’Connell and other panelists agreed Massachusetts was well-positioned to grow its biotech sector given its concentration of universities, research institutions, businesses, the entrepreneurs who create them and the venture capitalists who fund them.
William Guenther, president and founder of Mass Insight Corporation, said the state should develop another advantage — a large pool of teachers and students committed to biotech and other science and math jobs — through closer ties between industry, academia and government.
“We have a big opportunity, if we take it, to be the world leader in math-science teacher development,” Guenther said. “What we have here is primarily a culture issue to deal with — a lot of good things have come to this state, without really a clear design or clear strategy. We cannot rely on accidents to fuel our future economic development.”
Guenther’s group has launched Global Massachusetts 2015, a study effort with McKinsey & Company to create a vision for success in 2015 and beyond in life sciences and three other business sectors: Financial services, IT/communications, and defense.
In an interview after the conference, Guenther told BioRegion News that his group later this month will release proposals for several “collaborative initiatives” to boost the state’s life sciences sector, with an eye to incorporating those into the final report.
“We’re certainly starting from a position of great strength in the life sciences. The challenge for Massachusetts is to do what other jurisdictions are also doing, and that is to understand how to connect the dots between different assets and players,” Guenther said.
Despite its advantages, Massachusetts has a big disadvantage: A KPMG study cited during the conference placed Boston the sixth most expensive of 128 cities of more than 1.5 million people worldwide. The city was the fourth costliest location among biotech cities, and second costliest location for clinical trials.
“The cost structure is a bit out of whack,” creating a disincentive to biotech growth, said conference moderator George Tobjy, Northeast practice leader and senior manager, strategic relocation and expansion services for KPMG.
He acknowledged Massachusetts has improved its incentives for biotech and other businesses in recent years, but cited an old saying among economic development professionals: “They’ll never make a bad location good, but can make a good location bad.”
Among costs weighed by the KPMG study, Massachusetts ranked 43rd lowest among states in local property tax burden, third from bottom (47th) in corporate taxes, and one step above bottom in unemployment insurance.
“There are cost structures that are always looked at when we look at projects, and we need to overcome these issues,” Tobjy said.

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