STEVEN POFTAK
‘A fantastic place’

Land and housing prices in Massachusetts, along with exorbitant energy and unemployment insurance costs, are dramatically eroding business competitiveness, according to a new study by a Boston-based think tank.

“Measuring Up? The Cost of Doing Business in Massachusetts,” a survey produced for the Pioneer Institute for Public Policy by Global Insight, revealed that when compared with six competitor states, Massachusetts ranks among the least profitable places to do business. The Bay State is losing its competitive edge and many key businesses could be responding with their feet – and jobs, the study found.

“What we discovered, not surprisingly, confirmed what many businesses already knew,” said Steven Poftak, Pioneer’s research director. “Massachusetts is a high-cost state to do business relative to most of our competitors. Our costs are between 20 percent and 30 percent higher than similar companies in Texas, North Carolina and New Hampshire.”

In a presentation to more than 300 homebuilders and commercial developers at Boston’s Omni Parker House Hotel, Poftak was quick to add that Pioneer was not advocating a flight from the state.

“Our message is not to abandon hope and move your business to North Carolina,” said Poftak. “Massachusetts is a fantastic place to live. Our goal is to focus the conversation on what we can do about our competitive position and how to keep businesses and good jobs in this state.”

The study compared the business climate in Massachusetts to New Hampshire, Rhode Island, New York, New Jersey, North Carolina and Texas among nine industries including financial services, software, biotechnology, plastics, precision metal, aerospace, medical devices, information technology, and search-and-navigation instruments manufacturing.

One of the most troublesome findings came in an examination of the environment for the financial services companies, a major sector of the Bay State’s economy. The climate appears “almost hostile” when compared to the profit potential in neighboring and competing states, according to the study.

Financial services firms could earn 80 percent higher profits if they moved to New Hampshire; in North Carolina and Texas, earnings would more than double, the study said. After-tax profits are double, sometimes triple, compared to Massachusetts.

The report found that the high cost of living, high commercial and industrial rents and the high cost of unemployment insurance are major factors endangering the growth of the Bay State’s highest-paying industries.

Massachusetts, once the most successful state in the country for growing and attracting businesses in biotechnology, software, financial services and medical devices, is seeing its share of those businesses slip.

Other states are exploiting the commonwealth’s high cost of land and housing to lure employers. For example, the study found that in semiconductor equipment manufacturing, the ratio of the industry’s share of activity in Massachusetts to the industry’s share of activity in the nation has dropped 20 points since 1997, while it has risen in North Carolina and New York.

‘Increasing Disadvantages’
Pioneer’s study follows a U.S. Census Bureau report that indicated Massachusetts is losing residents at a greater rate than any other state but New York. The state’s population of 6.4 million dropped by nearly 19,000 between 2003 and 2005, according to the census data. Nationally, the biggest gains are being made in the South and West.

Despite conventional wisdom that Massachusetts health care costs are the highest in the country as a result of the concentration of expensive research hospitals in the Boston area, the data shows that health care costs for manufacturers in the Bay State are less than in New Hampshire, New Jersey, Texas and Rhode Island.

But such good news was tempered with harsh realities. For example, while the survey found that health care costs are less expensive in the Bay State than in several of the rival states, the modest advantage may not be apparent to Massachusetts manufacturers who have experienced a 30 percent increase in health care premiums over the last five years, compared to a 50 percent increase in some rival states.

Massachusetts has made significant progress on its once-runaway workers’ compensation costs. But the state is now falling behind in the burden placed on employers through unemployment insurance tax rates that are higher than all six competing states in the study. Massachusetts’ high UI expenses are partially the result of system loopholes that, if closed, would cut business costs and aid the state’s competitiveness, the study said.

In interviews with industry leaders statewide by the study’s researchers, inertia was listed among the top reasons firms remain in the commonwealth. Although the interviewees identified their company’s history as a reason for staying, some stated that inertia is only so strong and can be overcome by a noncompetitive business atmosphere. Furthermore, it is essential for Massachusetts to maintain a competitive business environment in order to attract new businesses to set down local roots.

Finally, the report shows what can be accomplished when reforms are undertaken. Before reforms were implemented in 1991, workers’ compensation was a disadvantage to Massachusetts businesses. Now, the system is a relative cost advantage, saving Massachusetts employers millions of dollars every year.

“There are increasing disadvantages to doing business in Massachusetts,” said James Stergios, Pioneer’s executive director. “Without significant reforms, the Bay State will not be able to compete with neighboring and competitor states, nor with the world. Improvements in unemployment insurance, energy costs and taxes would all help, but those are all secondary to the state’s most significant disadvantage: land and housing prices, which affect operating business expenses and cost of living.”

Still, at least one expert said the Bay State may be expensive, but worth it. Massachusetts may be highly competitive despite being an extremely costly place to do business, according to Laurence Kotlikoff, an economics professor at Boston University.

“Why are housing prices so high?” asked Kotlikoff. “Let’s start with New England. It’s the nicest place in the world. Where else you can live within a few hours of the Cape, Maine, Vermont and New Hampshire? It’s unbelievable. And within New England, Boston is the best place to live and one of the reasons is because we’re one of the intellectual capitals of the world. We also pay the highest wages because we have more productive workers, which should compensate them for the highest housing costs.”