postheadericon Beacon Hill Blotter: Tax Breaks

Beacon Hill saw a flurry of activity last week, from the passage of an over $300 million Supplemental Budget, to multiple Committee Hearings, one you may have seen both newspaper and television coverage of. On Tuesday afternoon, March 29th, the Senate Post Audit and Oversight Committee, of which I am the ranking minority member, heard testimony from executives of Evergreen Solar and Fidelity Investments.

State Officials are concerned over the recent decision by Fidelity to close its Marlborough facility and relocate some of those 1,000 jobs to Rhode Island and New Hampshire, and Evergreen Solar’s attempted sale of its $450 million dollar manufacturing plant in Devens after benefitting to the tune of almost $21 million in tax breaks and grants, and moving production to China.

These decisions highlight a larger problem for the Commonwealth.  Specifically, targeted tax breaks for favored industries, the Commonwealth’s inability to track job growth from tax incentives due to corporate shield laws, and the lack of effective clawback provisions allowing for the recouping of investments if job growth doesn’t meet expectations. In short, what I have believed for a long time is a failed tax policy and ineffective economic development strategy has created a situation where the Administration is gambling with your tax dollars, and putting the Commonwealth in a position of reading tea leaves to pick winners and losers in specific industries.

This has been the failed policy since 1996, picking the industry flavor of the month, Raytheon was first, then the film industry  - with testimony from this hearing claiming the state is giving away $113,000 in tax credits for every temporary film job created – , and most recently the biotech industry.

In the case of Evergreen Solar the Administration considered them a “winner” until they decided to close up shop and move to China.  Bringing us to one crux of the problem, state law protects companies from having to disclose tax information, making it virtually impossible for the Commonwealth to track the effectiveness of the tax and other incentives it offers. In the case of Evergreen that means when the economy shifts and the jobs “disappear” as Chief Executive Michael El-Hillow testified, the Commonwealth is left holding an empty $21 million bucket.

Testimony from Housing and Economic Development Secretary Gregory Bialecki indicates the Commonwealth could recoup up to $13 million from Evergreen through existing clawback provisions, but over $7million of that was an investment tax credit that went unclaimed. Some feel more effective clawback provisions could help the State in the future.

In the case of Fidelity a 1996 change in the tax code, not considered a tax break according to testimony of Fidelity President Ronald O’Hanley, allowed the mutual fund company to join manufacturers in benefitting from a single sales factor calculation for income tax rather than the three-factor formula which accounts for payroll and property. In this case Fidelity may be right; I do not categorize this as a giveaway.  I think it was a common sense incentive to get businesses to come to Massachusetts. The problem is that at the time of the passage the legislature required companies to increase employment by 5% a year for 5 years to take advantage of the single sales calculation. Fidelity exceeded this by creating nearly 3,000 jobs, double what it was required, while enjoying the tax break in perpetuity.

Frankly, Government should not be in the business of allocating a special benefit for one industry over another, or worse picking winners within one industry to receive special favors, tax breaks, or grants, as we now do with biotech companies through the “Life Sciences Initiative.”  This should serve as a wake-up call to this administration, and the legislature.

Tax policies need to be revisited, the tax code needs to be simplified and our corporate tax burden reduced across the board. Massachusetts is currently ranked #32 by the Tax Foundation in the State Business Tax Climate Index fiscal year 2011 calculations. Another step is making sure taxpayer investment is done with oversight and accurate information.

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