FaxSheet: Information and Updates on Current Issues
Analysis Shows Impact of Cellucci, House Leadership and Birmingham Proposals
are currently three major tax cut proposals before the Massachusetts
Legislature: a proposal introduced by acting Governor A. Paul Cellucci
in 1997 and revised this week; a proposal introduced by the House Leadership
and passed by the House of Representatives on March 11; and a proposal
introduced by Senate President Thomas Birmingham in February. Evaluation
of these proposals requires consideration of their effects on the state
economy and on state tax revenues. A tax-law change is generally more
attractive (1) the more it contributes to economic expansion, (2) the
less revenue it causes the state to lose, and (3) the more it contributes
to economic equity.
analysis prepared by the Beacon Hill Institute shows that, on the basis
of the first two criteria, the Cellucci proposal would confer substantial
economic benefits at correspondingly high costs in terms of lost revenue,
while the Leadership proposal would confer smaller economic benefits
and imposes a smaller revenue loss. The Birmingham proposal is by far
the least satisfactory of the three. It would contribute less to economic
expansion and cost more in tax revenues than the Leadership proposal.
of equity, the Leadership proposal would offer more generous
deductions for dependents, while the Birmingham proposal would double
the personal exemption. Both thereby favor low-income taxpayers, making
the tax code effectively more progressive and thus more equitable
from certain points of view.
in the Tax on Earned Income
proposal would cut the tax rate on earned income from 5.95% to 5%
over four years beginning in 1998. As a result, it would create $17.3
billion in new capital stock and 96,585 new jobs by 2001. See Table
1 Cut in State Tax in Earned Income: Economic Effects in 2001
in Capital Stock
Tax Revenue Effect
Tax Revenue Effect
Tax Revenue Effect
from BHI FaxSheet, March 11, 1998. Analysis
of all proposals was conducted using BHI's econometric State Tax Analysis
Modeling Program. All proposals would be partially effective January
1, 1998, with the Cellucci proposal phased in over four years and fully
implemented in 2001. Table 1 assumes full implementation of all proposals
Leadership proposal, introduced by Speaker Thomas M. Finneran, Taxation
Committee Chairman Peter J. Larkin, and Ways & Means Committee Chairman
Paul Haley, will be considered by the Senate. It would cut the marginal
tax rate on earned income in Massachusetts from 5.95% to 5.7% immediately.
It would also increase the exemption for dependents from $1,000 to $1,500,
expand the definition of dependents to include elderly or disabled relatives
living at the taxpayer's home and double the deduction for children
under 12 from $1,200 to $2,400 extending it to families with children
proposal would exert a positive but relatively weak effect on the economy.
It would increase the state capital stock by $4.4 billion and would
create only about 24,500 new jobs by 2001. This represents a far smaller
stimulus to the economy than the Cellucci proposal.
President Birmingham's proposal would permanently increase the personal
exemption from $2,200 to $4,400 for single filers, and from $4,400 to
$8,800 for joint filers.  Because it affects the marginal
income tax rate minimally, the Birmingham proposal would have very limited
impact on the economy. While Birmingham's proposal would cost a little
more than half of what Cellucci's plan would cost, it would create less
than 16% of the new jobs (15,066) and capital stock ($2.7 billion) created
by the Cellucci proposal.
changes in deductions and exemptions have a small effect on marginal
tax rates, they have a small effect on jobs, capital spending, saving
or business expectations. They amount mainly to tax expenditures
- revenue givebacks motivated more by equity (which is to say, political)
considerations than by economic considerations.
other hand, cuts in the marginal tax rate affect the economy because
they affect the cost to Massachusetts employers of hiring workers. The
lower the tax on earned income, the greater the number of workers that
employers are able to hire. As employers hire more workers, they also
create more capital (production facilities, warehouses, office buildings,
computers, and so forth).
proposals would cause revenue losses. The net revenue loss of Cellucci's
proposal is $1.011 billion (about 5.3% of the FY 99 budget). The net
revenue loss of the Leadership's proposal is $320 million (about 1.68%
of the FY 99 budget) and the net revenue loss of Birmingham's proposal
is $554 million (about 2.91% of the FY 99 budget). See Table 1.
small revenue losses associated with the Leadership and Birmingham tax
cuts on earned income are offset, however, by their correspondingly
weak contribution to job creation and capital spending. The larger losses
associated with the governor's proposal are mitigated by the greater
economic gains. Compared to the Leadership's proposal, the Cellucci
proposal gives almost four times the economic gain at a little more
than three times the cost in tax revenue. Compared to the Birmingham
proposal, the Cellucci proposal gives more than six times the economic
gain at less than twice the cost in tax revenue.
the Birmingham proposal provides for almost no change in marginal tax
rates while offering a substantial revenue giveback, it involves the
worst of all worlds: not very much economic gain and a substantial loss
in state revenue.
the Cellucci proposal provides for deeper cuts in marginal tax rates,
it generates a more powerful stimulus to the economy, albeit larger
in the Tax on Investment Income
these proposals also make changes in Massachusetts taxes on investment
income. Under current law, dividends, certain kinds of interest and
short-term capital gains are taxed at 12%. Under a 1994 law, the Legislature
substantially reduced the tax on long-term capital gains. Presently,
under the 1994 law, long-term capital gains (capital gains on assets
held more than one year) are taxed on a declining scale, from 5% to
0%, depending on the length of time the asset is held. See Table 2.
2 Long-Term Capital Gains Schedule
to a 12 months
than 12 months, but less than 18 months
than 18 months, but less than two years
than two, but less than three years
than three, but less than four years
than four, but less than five years
than five, but less than six years
than six years
to assets acquired January 1, 1996 or later.
proposal would reduce the tax on dividends and certain interest
income from 12% to 5%, phased in over time. The Leadership's proposal
would reduce the tax on dividends and certain interest income from 12%
to 5.7% and reduce the tax on short-term capital gains from 12% to 10%
immediately. But it would also raise the tax on long-term capital gains
in two ways. First, it would eliminate the sliding scale enacted in
1994 (and detailed in Table 2) and raise the tax rate on all long-term
capital gains to 5.7%. Second, it would redefine long-term capital gains
as assets being held longer than 18 months. This would represent a tax
hike for assets held from 12 to 18 months since the tax on these assets
would rise from 5% to 10%. 
The Birmingham proposal would have only a minimal effect on the
marginal tax rate for interest income and capital gains.
proposal would preserve the tax on investor income. Any tax on investor
income violates the principle that all income should be taxed only once,
that is, when it is consumed. Taxes on investor income are taxes on
saving and therefore amount to penalties on saving.
the Leadership proposal reduces some taxes on investment income, it
raises the tax on long-term capital gains. This is a change in the direction
of Massachusetts tax policy away from lower taxes and toward higher
taxes on long-term capital gains. It forestalls the possibility of much
lower tax rates on other investor income. It also undermines the confidence
of investors in the Legislature's ability to develop a consistent policy
toward the taxation of investor income.
proposal, on the other hand, only lowers taxes on investment income
and cuts them by a greater amount. It therefore sends a far more positive
message to businesses and investors about the direction of Massachusetts
In fact, the actual change in personal exemptions would be smaller than
this. The actual change is the difference between the new levels proposed
by Senator Birmingham and the levels currently in effect. In 1997 these
levels were $2,360 for single taxpayers, $5,260 for married taxpayers
filing jointly, and $4,065 for heads of household. Because the Birmingham
proposal would largely deplete the tax reduction fund, the exemption
for heads of household would actually fall from its 1997 level
of $4,065 to its permanent level of $3,400, which remains unchanged
under the Birmingham proposal.
Although the leadership proposal distinguishes between investment income
and capital gains, this distinction is misleading and is not made here.
Capital gains are correctly understood as part of investment income.
3/31/98 Revised on
11-Jul-2007 1:46 PM