Budget issues keep Massachusetts on edge

By Andre Mayer | MassLive.com | February 10, 2013

The new year began with good news for Massachusetts employers. The American Taxpayer Relief Act of 2012, signed into law by President Obama on Jan. 2, largely addressed the tax issues that constituted most of the “fiscal cliff,” and did so in ways relatively favorable to businesses and to our state’s economy.

The next round of news from Washington is likely to be more difficult to take, however; and some major long-term concerns may become even more challenging.

The tax agreement removed a huge uncertainty that had confronted not only households, but also the large majority of businesses enterprises that are subject to personal rather than corporate taxation. It averted large rate increases that might have pushed the national economy to the edge of recession – and the Massachusetts economy, already slowed by weakness in export markets, possibly over the edge.

Those higher tax rates, moreover, would have hit high-income states like Massachusetts (and Connecticut) especially hard. There are some additional positive aspects to the settlement, including a permanent fix for the alternative minimum tax and restoration of the research and development tax credit, both important here.

What the tax agreement did not yield was much hope that Washington will avoid deadlock over the upcoming debt ceiling issue, revisiting a conflict that dashed business confidence in 2011, and over spending cuts for deficit reduction. (It’s not just an American problem; the Eurozone, a key export market, faces similar political deadlock on fiscal issues.)

The budget cuts are now likely to be larger than they might have been had the tax settlement produced more revenue, and their impact will fall more directly on specific economic sectors and employers than tax increases would have. At this point. we do not know the extent or distribution of the cuts that are surely coming.

Massachusetts does not have exceptionally large numbers of federal employees, but it does have many well-paid private-sector jobs that depend to some extent on federal funding. We are a top-five state in both defense contracts and research grants. We have large health-care and higher-education sectors. Local employers in these fields are waiting for the other shoe to drop.

The University of Massachusetts system alone, for example, is contemplating a possible $100 million hit on research support. Despite progress on taxes, uncertainty still prevails, with the effect of discouraging new investment and, especially, much-needed job creation.

The national situation exacerbates challenges here in Massachusetts. Although the Patrick administration and state Legislature have done a responsible job of managing through the recession and maintaining the business climate, the state’s structural deficit remains. With little hope of federal assistance on transportation funding, that issue has reached a crisis point.

Even more critical for employers is the status of our education and work force development system, always fragmented and now, after years of funding constraints, increasingly inadequate in the face of rising demand for high skills in the modern economy.

At Associated Industries of Massachusetts, we have been hearing from member employers for some time about shortages of skilled workers to fill open jobs. That is in a time when the state unemployment rate is back up to 6.6 percent, and runs considerably higher in most areas outside Greater Boston.

The Massachusetts forecast developed by Alan Clayton-Matthews, of Northeastern University, for the New England Economic Partnership shows that unemployment will remain above 6 percent into 2015, at which point workforce constraints will become a significant impediment to economic growth. For the present, however, the Massachusetts economy is in reasonably good shape, despite global headwinds for some important industry sectors.

In the fourth year of expansion, Gross State Product (GSP) is 4.5 percent above its pre-recession peak, and 87 percent of the jobs lost in the downturn have been recouped, which is a much better employment result than we achieved after the prior (dot-com) downturn. AIM’s Business Confidence Index has rated business conditions in Massachusetts above those prevailing nationally in every month except one through the recession and recovery – a sharp contrast to past experience.

The New England Economic Partnership forecast, which was based on realistic assumptions about “fiscal cliff” outcomes, called for moderate GSP growth (2.3 percent) in 2013, accelerating in 2014 and 2015, with a similar pattern for employment. The actual tax agreement probably pushes national baseline growth up a bit, and the state’s growth with it.

A lesser tax increase helps economic growth, but may mean larger budget cuts, with more impact on certain industries. The recovery from the recession was already uneven, in two different respects: the road back has been bumpy for all, and some regions and sectors have moved ahead faster than others. The outlook for 2013 shapes up as more of the same.

Andre Mayer is senior vice president for communications and research for Associated Industries of Massachusetts; to learn more about Associated Industries of Massachusetts, go online to: www.aimnet.org

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