Archive - Budget and Taxes

Massachusetts, Raytheon Company, and the Sales-Only Formula: "Payoffs for Layoffs"(1)

Massachusetts' experience following its 1995 enactment of a single sales factor formula illustrates well the ineffectiveness and wastefulness of the formula as an economic development incentive. Massachusetts enacted the sales-only formula in response to a threat by the Raytheon Company -- a major defense contractor and the state's largest industrial employer -- to close plants in the state unless it were granted substantial tax relief. A sales-only formula was high on the company's wish-list as a mechanism for such relief. The Massachusetts legislature initially attempted to limit the application of a single sales factor formula to defense contractors, but this proved politically impossible. All non-defense manufacturers were also granted a sales-only formula -- albeit on a phased-in schedule.

What has Massachusetts received for its $80 million-plus annual "investment" in its manufacturing industries?(2) Although the relatively brief experience of a single state with a sales-only formula does not prove that it is an ineffective development incentive, the initial experience in Massachusetts has not been encouraging:

Between 1995 and 1999, Massachusetts lost more than 12,000 manufacturing jobs. This 2.85 percent decline was more than five times larger than the 0.5 percent decline in manufacturing jobs for the U.S. as a whole over the same four years.

Only fourteen states had a steeper rate of decline in manufacturing jobs than did Massachusetts over this period.

The Boston Globe concluded "More than four years after Massachusetts enacted a controversial tax break to save manufacturing jobs in the state, there's scant evidence the policy has worked as advertised."(3)

The job-creation record has been just as disappointing in the defense industry, which, unlike the rest of the manufacturing sector, was granted single sales factor treatment immediately. Raytheon's performance since 1995 includes the closure or sale of several major Massachusetts facilities and a 3,000-person reduction in its Massachusetts workforce. This has stirred up considerable anger on the part of labor organizations that had supported the company's demand for tax relief.(4) In order to qualify for single sales factor treatment (through 1999), defense contractors were required to maintain their Massachusetts' payrolls at 90 percent of their 1995 levels. In the face of massive layoffs of its blue-collar workforce in Massachusetts, Raytheon managed to meet this requirement largely by increasing the salaries of engineers and managers. This has sparked legislation to renew the job maintenance requirement and to convert the 90 percent of 1995 payroll requirement to 90 percent of 1995 employment. The sponsor of this legislation, State Senator Susan C. Fargo, has labeled the single sales factor formula granted to defense contractors "payoffs for layoffs."

Raytheon's defenders assert that no matter how many Massachusetts jobs the company has eliminated, even more would have been lost had the state not enacted the sales-only formula. Raytheon has gone so far as to release data showing that as a share of total employment, the reduction-in-force in its Massachusetts facilities has been far lower than that in other states -- suggesting that the state's adoption of the sales-only formula was a wise investment nonetheless. There is a problem with this interpretation of the data, however. The state experiencing the second-largest proportionate drop in its Raytheon workforce and the highest number of job losses in absolute terms was Texas -- also a state with a single sales factor formula.(5) Raytheon has not explained how the single sales factor formula is responsible for the preservation of Massachusetts jobs yet has not had a similar effect in Texas. Moreover, press reports indicate that Raytheon has shifted several of its major contracts to facilities in Arizona -- a state without a single sales factor formula.(6)

Unarguably, Raytheon has suffered a considerable decline in its economic fortunes because of cutbacks in defense contracting since the end of the Cold War; some job reduction in Massachusetts may have been inevitable. But that really is the point. Corporations will accept tax breaks gladly if states offer them and will even lobby strongly to obtain such breaks. In the final analysis, however, corporations almost always will locate their investments and employees where fundamental business considerations demand. Most tax breaks simply confer wasteful windfalls on corporations, rewarding them for creating jobs they would have created anyway -- or, in Raytheon's case, even for eliminating jobs.

1. This article is excerpted from a forthcoming paper by Michael Mazerov, Center on Budget and Policy Priorities, Washintgon, DC. www.cbpp.org

2. Massachusetts' politically-potent mutual fund industry also demanded a single sales factor formula, which was enacted in 1996. Mutual funds are required to increase their employment five percent annually in order to preserve eligibility for sales-only apportionment. This is a rate of growth far below their recent experience and one that most mutual funds apparently have had little difficulty satisfying. According to the Massachusetts Department of Revenue, the FY00 revenue loss associated with the single sales factor for defense contractors and other manufacturers is approximately $85 million and for mutual funds, $46 million.

3. Ross Kerber, "Has Single-Sales Factor Done the Job?" Boston Globe, January 16, 2000.

4. "Raytheon Hit for Cutting Jobs; Tax Breaks Under Fire," Boston Herald, January 6, 2000; "Labor Activists Press Case for Tough Tax-Break Rules," Boston Globe, January 6, 2000.

5. Table released by the Raytheon Company, "October 7 [1998] National Consolidation, 14,000 Reduction in Force, 1998 and 1999 Implementation."

6. "Raytheon to Sell Unit; Layoffs Due," Boston Globe, November 4, 1999; "Raytheon's Vow to Meet Payroll Levels to End," Lawrence Eagle-Tribune, November 25, 1999; "Where is Raytheon's Commitment?" Lawrence Eagle-Tribune, June 9, 1999.

Related Reports:

Full text and fiscal note of SB 701 and HB 11.
Our testimony in .pdf format.
Testimony of Michael Mazerov of the Center on Budget and Policy Priorities.
Our Maryland Policy Report on taxes on manufacturing firms