A look at the silent effect of taxes

"Textbook economics tells us that if we penalize people for working or saving, they will do less of it."

June 1992

Almost a year ago, writing in this space, I warned against the feeling, then nascent, that Gov. William Weld had won the war against runaway state budgets.

One reason for this pessimism was, odd as it may seem, my expectation that within a year or so the state would begin to recover economically. The authors of runaway budgets - having fallen temporarily silent since the Dukakis days - would come back to life and renew their campaign to soak up every penny in new tax revenue that the growing economy would produce.

Well, here we go again.

Gov. Weld proposed a budget of $14 billion for fiscal year 1993, up from the budget of $13 billion the legislature adopted last year. Some legislators, encouraged by an unexpected spurt in tax revenues, are pushing for a budget in excess of $15 billion.

Senate Ways and Means Committee Chairwoman Patricia McGovern (D-Lawrence) accuses the governor of being "disingenuous" for proposing tax reductions whose fiscal '93 cost to the treasury would be less than $200 million or about 1.5 percent of the budget.

Someone is being disingenuous all right, but it isn't the governor. Two years ago, the tax-and-spend lobby successfully opposed a ballot measure that would have cut state taxes by more than $2 billion. The measure, it was said, went "too far." Now we learn that a tax cut of one-tenth this amount likewise goes too far.

Massachusetts taxpayers should get the message: Barring political change that extends well beyond the executive branch, there will be no significant tax cuts in Massachusetts. What there will be, however, is a steady rise in spending.

Some might think that this is perfectly acceptable. As long as tax rates don't go up, what is wrong with the state's appropriating the fiscal dividend produced by a growing economy to meet the many "needs" of state government? The trouble is that the same people who bring us ever-rising state budgets have plans of their own for tax "reform."

They are already busy with proposals to institute a graduated income tax, to force corporations to make public their tax returns, and to make it easier for municipalities to bypass Proposition 21/2. There is also the question of whether the promised benefits of another billion dollars or so of state spending are really worth the costs in terms of the amenities sacrificed by taxpayers who pay the bill.

Much more fundamental is what we might call the silent loss imposed by ever-rising state budgets. Textbook economics tells us that if we penalize people for working or saving, they will do less of it.

If we tax them for shopping in Massachusetts, they will shop in New Hampshire. If we tax them for dying in Massachusetts, they will retire to Florida. Taxes distort economic choices and , in the process, impose a loss, measured in reduced personal income and fewer jobs, on the economy. This loss is "silent" because no one lobbies against it the way the teachers' union and other special interests lobby for increased spending. But it is real, nevertheless, and makes itself felt in a reduced standard of living for all of us.

Massachusetts voters could, if they wanted, eliminate this "silent loss" by holding spending (in real, inflation-adjusted dollars) constant and by reducing tax rates. That's because unchanged tax rates produce growing revenues in a growing economy.

The Beacon Hill Institute at Suffolk University predicts that Massachusetts tax revenues will be about $9.2 billion in the current fiscal year. Assuming no change in tax rates and adjusted for inflation, they will reach about $9.6 billion in fiscal '93. If, as we expect, the national and state economies continue to grow thereafter by about 3 percent a year, the comparable figure for fiscal 1999 will be about $11.7 billion.

Suppose that, instead of appropriating for its own purposes the revenues produced by this growth, the legislature cut taxes by just enough to keep tax revenues and, therefore, state spending (again adjusted for inflation) at about their '92 levels. We estimate that the legislature would, by this action, add more than $1.5 billion to Massachusetts personal income and create more than 25,000 new jobs by fiscal '99.

These gains are not transfers from public- to private-sector activities, but gains to the entire economy that will be sacrificed unless tax rates are cut.

Unfortunately, in the rush to spend, there has been no attention by the legislature to the long-term silent effects of taxes. The focus is, instead on wholly irrelevant short-term considerations like state bond ratings and the exact amount of tax revenue for fiscal 1993.

By almost deliberately underestimating '93 tax revenues, the legislature is setting itself up for criticism again next year for its failure to fund "needed" programs when the money was there all along.

Last year's warning is, therefore, proving prophetic. Recognizing that tax reduction once tried, might catch on with Massachusetts voters, the big spenders continue their mainly successful campaign to resist every proposed tax cut that makes its way to the legislature or ballot box. Meanwhile, taxpayers suffer in silence as the governor's economic growth plan is put on hold. It is not a pretty story, but someone has to tell it.

David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics at Suffolk University. This article first appeared in The Boston Herald on June 7, 1992.

Format revised on: Thursday, February 1, 2007 4:21 PM

Format revised on May 12, 2005 12:26 PM