John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
The Commonwealth of Massachusetts has a government agency described as “the state’s venture capital firm.” I can’t put my finger on it, but something does not seem right about that.
Actually, I can put my finger on it. The state should not be in the business of picking winners and losers.
The Massachusetts Technology Development Corporation (MTDC) is one of many quasi-state agencies promoting economic development. It is referred to as quasi-state because it receives state (and federal) money, but neither the Governor nor the legislature directly control what it does.
During the 1980s, the state granted MTDC $4.2 million dollars to establish a venture capital fund. The state added economic stimulus money during the past decade.
MTDC uses the money to invest in a “portfolio” of Massachusetts-based companies. The companies operate in fields designated as growth opportunities. The portfolio currently includes a digital printing company in Chelmsford, an optical networking company in Andover, and a healthcare information technology company in Waltham.
If the companies do well, MTDC uses investment returns to replenish the venture fund. According to MTDC the portfolio has been successful, and companies they have backed have created lots of jobs.
Helping start-ups acquire capital may promote economic development. Emerging firms need capital, and that capital can be difficult to obtain, especially when credit markets are tight like they are now.
However, with a venture capital fund, the state is deciding which start-ups will get money. They are picking winners and losers. For the fund to be successful we have to trust MTDC will make the “right” investments. Even if they do pick wisely, is it right that taxpayer money is helping determine which firms might lose because the government’s venture capitalists decided they were not portfolio worthy?
Even more disturbing is when the state gives away money by quietly approving tax credits for chosen companies. That is the job of the Economic Assistance Coordinating Council. As a recent example, they awarded gun maker Smith & Wesson $6 million.
The Council operates under an Economic Development Incentive Program. One part of the program gives tax subsidies to companies in designated Economic Target Areas. To qualify as an Economic Target Area a city or town must be “economically distressed.”
The incentive program was designed for cities like Lowell, but companies in towns like Bedford and Lexington are eligible. Median incomes in Bedford are more than twice that of Lowell. In Lexington, they are almost three times as high. The Board of Selectmen in Chelmsford recently voted to apply to the State for designation of the entire Town as an Economic Target Area.
The state, and local municipalities that offer property tax breaks through this program, get a “promise” of private investment and job creation. Just last month, the Massachusetts Life Sciences Center revealed that in their industry half of companies awarded tax incentives failed to create promised jobs.
Governor Patrick has asked for transparency on issues ranging from financial reform, to casino legislation, to managed competition for auto insurance. However, the Economic Assistance Coordinating Council operates without transparency. They are not required to reveal the companies that they give money to, or how much they get, until after the grant is awarded.
Privacy laws prohibit the Department of Revenue from revealing who gets tax breaks. Their Tax Expenditure Budget tells us, for example, that the state will give away about $300 million this year as part of the “Adjustments to Apportionment Formula.” However, taxpayers will never know how much individual companies receive.
We know Fidelity Investments has been a big winner with this tax break. Now more than a thousand workers are losers because Fidelity is moving more jobs out of state.
Picking winners is just another form of political patronage. Legislators have been taking a lot of heat for helping friends get state jobs. We should criticize them for helping companies get tax breaks in an ill-advised attempt to create jobs.
A tax break that has received a lot of attention is the film tax credit — a $100 million ticket. With life sciences or healthcare or information technology, the state can leverage an inherent competitive advantage. That is not the case for the movie industry. We are simply competing based on tax giveaways against many other states that want the cache of Hollywood productions.
As far as job creation and economic development, the credits are not working according to a report recently issued by the Department of Revenue. One problem is that 25 percent of the spending eligible for the credit went to nonresident actors making more than a million dollars. Producers making a film that features Lowell decide to shoot scenes in Lowell, and Mark Wahlberg goes back to Hollywood as the big winner.
The case of Evergreen Solar moving a manufacturing facility from Devens to China has also received attention. Green energy may very well be an industry of the future. However, do we really want to use public dollars betting that one particular company is going to be a winner, and that they will continue to operate in Massachusetts?
I asked Robert Tannenwald from the Federal Reserve Bank of Boston about tax neutrality. Neutrality is the idea that tax policy should not play favorites. Tannenwald is a well-respected economic analyst who has served on a number of state tax commissions. He said:
“If we paid more attention to neutrality and fairness perhaps competitiveness would take care of itself.”
Massachusetts usually does well in studies of state competitiveness. When it comes to taxes, the problem is not that tax rates are too high. Studies criticize us for poor tax equity and lack of neutrality.
We need to make sure Massachusetts continues to be a great place to do business – any business! In addition to lack of tax equity, lack of affordable housing, an improved but still cumbersome permit process, and crumbling roads and bridges are obstacles that we must address.
The state has competitive advantages, in particular our workforce. We should leverage our advantages and that may lead naturally to growth in certain industries. However, we do not have a competitive advantage in, and there is nothing natural about, the government picking winners and losers.