The lessons of GE’s move to Boston

LURKING BEHIND GENERAL ELECTRIC’S DECISION to relocate its headquarters to Boston is the hotly debated issue of why businesses locate and grow in Massachusetts or decide to consolidate or expand in other states.

In the case of GE, the governor, mayor, GE officials, the media, and commentators all joined in a chorus of praise for the state’s high tech and innovation economy as if that were the sum and substance of the story.

Since the announcement in January a more complex picture has emerged, and, in particular, the role played by state incentives and city tax breaks. (See Michael Jonas’ April 7 piece in CommonWealth.) From the outset, state and city leaders acknowledged but downplayed the incentives. Now the back story that has emerged depicts the scrambling that took place behind the scenes to sweeten the deal, and in the end GE received a very sweet deal indeed.

In the debate about how to encourage job growth in the state, those on the left regularly highlight the importance of investments in transportation and education to help stimulate our innovation economy, while downplaying the impact of business taxes and costs. They frequently cite overly simplistic academic studies that conclude that the level of taxes is not a significant factor in where businesses decide to locate.

To be sure, the world’s largest biopharmaceutical companies are attracted to Cambridge and Boston because of our vaunted private universities and medical schools and any concern about taxes is secondary. However, for most of these companies their focus in Massachusetts is on research and development, and not production. When it comes to manufacturing, most of the companies, like those in other industries, look to states like North Carolina that combine strong research universities with a significantly lower and more competitive cost structure.

Massachusetts’ high business costs have led to the loss of tens of thousands of middle class jobs over the past quarter century, especially outside of Greater Boston. And those lost jobs have cost hundreds of millions of dollars in state revenues each year, revenues that are dearly needed for investments in transportation and education.

One of the many ironies surrounding GE’s move is that the company’s decision to leave Connecticut was propelled in part by a large increase in corporate taxes as part of that state’s efforts to balance its budget. Last June GE issued an extraordinary public letter decrying the proposed tax increases and threatening to find a new home for its headquarters. The final legislation included a sweetener for GE but the damage had been done.

To compound the irony, GE says it was attracted to Boston as an innovation and technology hub — less than three years after Massachusetts passed an ill-fated tax on computer and software services which would have stifled the very innovation that fuels so much of our state’s economy. After an uproar, the tax was quickly repealed, and of course there was no mention of this chapter in all the self congratulations surrounding GE’s decision to move to Mecca.

Now let’s be clear that Greater Boston’s high tech economy and talent are an enormous competitive advantage. And these assets were clearly central to GE’s decision. But even with these advantages, tax breaks and incentives were a critical part of the company’s choice of Boston.

The GE deal is a microcosm of a larger reality that the key to Massachusetts’ economic future is a balanced approach requiring investments in education, transportation, health care, and human services on the one hand, while making every effort to achieve a more competitive business cost structure on the other. And here we have a final irony. While political and business leaders regularly give lip service to the importance of investing in transportation and education, Massachusetts for decades has shortchanged funding for public transit and public higher education. Study after study has documented the shortfall in funding for transportation across the Commonwealth, and state budget support for the University of Massachusetts badly lags other states’ support for their premier public universities.

GE’s relocation to Boston is probably a good deal for the state and the city, less in pure economic terms but more as a signal that Greater Boston is a center of innovation and entrepreneurship populated by some of the most talented individuals on the planet. But we do ourselves no favors if we smugly pat ourselves on the back and ignore the fact that our economic future is not guaranteed. We need to invest in our human and capital infrastructure and we need to create a more competitive business climate to generate the jobs that produce the revenues to pay for those investments. It’s not one or the other; it’s both.

Michael Widmer is the former president of the Massachusetts Taxpayers Foundation.