TAXES AND NEW BUSINESS

Mainers got a fresh slant last week on the old thought that high taxes discourage businesses from settling here. It’s only one factor, a leading Boston economist told a forum at the Maine Center for Economic Policy in Augusta, and not always a leading one.

Robert Tannenwald, vice president and director of the New England Public Policy Center at the Federal Reserve Bank of Boston, has had long experience there with the growing custom of blaming problems of economic growth on taxes. Anti-tax advocates coined the disparaging term “Taxachusetts,” and the slur has helped perpetuate the idea in Maine.

The controversy involves the so-called “supply-side” economics, popularized in the Reagan and Bush administrations, which holds that cutting taxes promotes economic growth. Mr. Tannenwald says that theory is grossly overdone. He cites some “sloppy and biased” analyses that manage to demonstrate a cause-and-effect relationship between tax changes and economic growth.

He pointed to one such study, “Holding Taxachusetts at Bay” by the Beacon Hill Institute, which tried to show a direct relationship between tax rates and migration into the state and thus to economic growth. In a commentary, Mr. Tannenwald suggested other factors that had gone unmentioned: expensive housing, high energy costs, climate, tax burdens relative to those imposed at alternative sites, amenities including the quality of public services that cannot be funded without tax revenues, crime rates, health facilities and health care costs.

Of course, a business deciding where to build a new plant or open a new operational center may check state-by-state tax statistics and be put off by finding Maine at or near the top. Maine’s cold winters and transportation distances and inadequacies can also be turnoffs.

But as far as taxes are concerned, an informed decision would first consider only those that directly impinged on profits. Mr. Tannenwald notes that state and local business taxes typically are only 1 to 3 percent of total business costs and only one-tenth or one-fifteenth of labor costs. So the tax difference would be negligible in a comparison with a state with a 10 percent lower tax burden.

He asks whether cutting the tax burden dramatically would really help competitiveness. In some specific cases, the answer may be yes, but he also notes that cutting support for infrastructure, education, public safety or environment could actually undercut competitiveness. Instead of lowering taxes, he suggests changing the mix of spending and raising outlays on public services especially valued by business.

Another consideration, which the economist said he had heard privately, can be which tax schemes are most generous to a firm’s top executives, the ones that make the decisions on where to put new facilities. But that suggests still another possibility: Perhaps they place special value on skiing, hiking, sailing or even taking an occasional invigorating dip in the cold waters of the Atlantic Ocean.

His observations should make Maine policymakers stop talking about high taxes generally and to start examining specific opportunities for reform, balancing the benefits those revenues currently provide.