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Strength and, Weaknesses of Massachusetts’ Business Domain: The Basis for Creating Policies to Ensure the Stability of Economy

Strength and, Weaknesses of Massachusetts’ Business Domain: The Basis for Creating Policies to Ensure the Stability of Economy

Introduction

Massachusetts is one of the most competitive states in United States. By competitive we mean that the state has ranked itself to be one of the most valuable assets in terms of making the economy of the country prosperous and robust. That is the state has been said to be in the top ten list of the most productive economy with such high index values and income generating capacity. It has been reported that the state has become one of the pillars of the continuous innovations in technology (which is a determining factor in the competitiveness) of the global market. John Adams Innovation Institute said that the competitive advantage of the state is bright people flowing through an astounding array of public and private institutions for care giving, learning, research, technology transfer and commercial enterprise.

One of the most essential assets of the state is its world class community of universities which provides a high quality of education (Angelini). This is the key factor why Massachusetts could sustain a high level of income for its citizen. Moreover, the high quality educated work force and

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an open diverse economy carries the resources its financial enterprise to its many technology start ups (Mayer). Massachusetts boasts its four largest employers which comprise Boston and Cambridge universities and research and teaching hospitals.

Metropolitan Boston’s Life Sciences cluster is one of the economic highlights of Massachusetts. This cluster comprises mainly of teaching hospitals, and academic institutions increasing number of private sectors which focus in biotechnology, pharmaceutical and medical devices. Moreover, this cluster boasts measurable impact on the area economy, manifested by the number of employees and jobs, as well as growth projections. It was recently estimated that there are over 42,000 employees in the core life sciences industries in 2004, with an additional 263,000 jobs in the “supporting” life sciences and health care industries (Polack and Danahy).

The life sciences cluster is characterized by high growth due to the Massachusetts Technology Collaborative projects. Moreover, it was projected that because of the collaborative projects, the number of jobs in the life sciences industry in the Boston area will double by 2010 (JAII).

The educational and medical institutions provide a resource of skilled labor for the private sector generating technological advances from their research and development activities (Polack and Danahy).

Polack and Danahy said that medical school of Harvard University, Boston University and Tufts University, along with 14 teaching hospitals in Boston, employ 97, 000 workers in Massachusetts. This is according to 2007 report by the Conference of Boston Teaching Hospitals which also reported that these medical schools generate $24.3 billion in economic activity and more than $839 million in revenue for the Commonwealth.

Moreover it has also been reported that there are eight research universities of Massachusetts which grant doctoral degrees. These universities spend at least $10 million annually of research and houses 50, 000 workers. These workers as reported by the Association of Independent Colleges and Universities of Massachusetts, have a combined 2002 payroll of more than $2.5 billion. These universities have received $1.5 billion in research funds and their affiliated hospitals and research centers attracted an additional $1 billion, with 80% of the funds coming from Federal sources. (Polack and Danahy)

The Problem

Despite this very competitive business domain of the state, it still faces a lot of dilemmas which tend to make its economy unstable. The increasing cost of living in the state which encompasses health care cost and housing cost makes the economy more unstable because it does not attract investments. Prices of housing increase greatly before the income of the workers increases thus creating a wide range of “affordability gap” (http://www.masseconomy.org/pdfs/7_2jan06ceopress_244D05.pdf). Jobs are very much available in the state however skilled workers continue to decrease in number because the population of the state also decreases tremendously (http://www.masseconomy.org/pdfs/7_2jan06ceopress_244D05.pdf). Massachusetts business tax law is also said to be one of the greatest burdens of every corporation in Massachusetts. These corporations seek relief from the very huge tax rate that the state government has imposed upon. This very huge tax rate tends not to attract business. To ensure the state’s long – term economic health it was said that there is a need to expand the business tax base while cutting the statutory tax rate on corporations. (Angelini)

Taxation of legal business entities varies considerably from business to business. Massachusetts taxes do not achieve horizontal equity. That is the application of a tax to two equal individuals or entities should be treated equally. Firms with similar business income face different tax burdens, depending upon the legal forms they may have chosen. Reports say that there is the wide disparity in taxation. “Some businesses are subject to double taxation, taxes on tangible property, taxes on net worth, minimum taxes, annual report fees or some combination of the above.” In addition, the vertical equity is not met because there is a tendency that individuals and firms with different incomes are unable to pay this huge tax rates. The increasing cost of unemployment insurance is due to the increasing unemployment taxes due to subsidies paid to fund disproportionate benefits. (Angelini)

According to John Adams Innovation Institute Massachusetts lacks abundant and inexpensive land that eases the strain of economic expansion. The state struggles with energy dependence. And the housing market is unkind to the very demographic which are young people starting their careers that is essential to the vitality of the economy.

Proposed Solution

To address these growing issues, policies have been proposed by the Beacon Hill Institute to reform the taxation in Massachusetts. The proposed comprehensive business tax reform will broaden the base by eliminating credits and loopholes and lower the rate for almost all business entities to 5.3%. The Institute proposes that the Commonwealth should: set the tax rate at 5.3%, the same rate as for individuals; eliminate the $2.60 per thousand tax on tangible personal property or net worth, applicable to C and S-corporations only; eliminate the conduit concept by taxing entities at the rate of 5.3% at the entity level; eliminate the double taxation of C-corporation earnings (and large S-corporations) by taxing business entities (domiciled in MA or with nexus) by 5.3% at the entity level (as apportioned if multi-state) and eliminating the tax on corporate dividends to C-corporation shareholders or flow-through income from conduits; eliminate the $456 minimum tax on C- and S-corporations; adopt combined reporting and unitary tax principles, without a “waters edge” election. The goal of combined unitary reporting is to eliminate the tax avoidance potential of inter-company transactions. This means that consolidated income tax returns to the state would be more effective. (Angelini)

This will apply to all types of entities, not just corporations. To a adopt single-sales-factor apportionment for all entities and industries, not just some; allow net operating loss carryover deductions by sole proprietors, corporate trusts and partnerships; eliminate all tax incentives; and allow a 100% dividends-received deduction for dividends received by corporations, regardless of the percentage owned this will eliminate triple taxation and thus increases the earnings.(Angelini)

“Under single-sales-factor, non-Massachusetts companies doing business in Massachusetts would allocate more of their income to Massachusetts than they do under the three-factor formula, because they usually have little property and only small payrolls in the Commonwealth. Single-sales-factor would induce the same companies to site more of their property and payrolls in Massachusetts.” (Angelini)

The state is playing the bridge for industry and academia to collaborate which seems to be a good strategy for a more progressive economy. An example of this is the Massachusetts Business Connect Program. Launched in early 2006, the program caters in needs assessments and resource identification at companies regarding their R&D needs. (Mayer)

Works Cited

Angelini, J., Conte, F., Sanchez-Penalver, A., and Tuerck, D.G. “Business Taxes in Massachusetts:Toward Fundamental Reform”. The Beacon Hill Institute at Suffolk University (April 2008): 9 April 2008 <http://www.beaconhill.org/BHIStudies/PrevWage08/PressReleaseBHIPrevWage-080207.pdf>

Mayer, Heike. “A Review of State R&D Investment Funds: Ten Case Studies”. Final Report: (March 2007). 9 April 2008 <http://www.nvc.vt.edu/uap/docs/HeikePublications/Heike%20Mayer%20Virginia%20Tech%20Publications/A_Monographs/Mayer%20(2007)%20Pew%20NGA_Final%20Report_March%201%202007.pdf>

O’Leary, J. and Poftak, S. “Unemployment Insurance in Massachusetts: Burdening Businesses and Hurting Job Creation”. Pioneer Institute and Public Policy Research (January 2008): 9 April 2008. <>

Polack, S. and Danahy, A.D. “Connecting with Our Economic Future: Transportation Investment Strategy for the Life Sciences Cluster”. 9 April 2008. <http://www.bostonchamber.com/policy/Financial%20Services/SecuringMassFinSvcsLdrshp.pdf>

__________. “Statement of the Governing Board of MTC’s John Adams Innovation Institute”. (June 2005): 9 April 2008. <http://www.mtpc.org/institute/life_science/PolicyRecommendations5_11_05.pdf>

__________. Massachusetts Toward a New Prosperity: Building Regional Competitiveness Across the Commonwealth. <http://www.masseconomy.org/pdfs/7_2jan06ceopress_244D05.pdf>

 

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