Surrendering and reclaiming the high ground on tax policy

The single-sales-factor formula was adopted in 1995 on the promise that it would keep manufacturing jobs from leaving the state. Since then manufacturing jobs have decreased by 17%.


by David Tuerck

June 27, 2003

Last year, four influential groups conducted a successful campaign to cancel a scheduled reduction in the personal income tax from 5.3% to 5.0%. The leaders of this campaign had to convince the state legislature to undo a ballot measure endorsed by a series of governors and approved by an overwhelming majority of voters.

In terms of its effects on the state economy, cancellation of the tax cut could not have come at a worse time. With the state economy in a stall, the tax cut would have helped the bottom line of every independent business in the state. According to calculations made by the Beacon Hill Institute, the decision to cancel the tax cut has caused the loss of 10,328 new jobs, about one-third of all jobs lost over the last year.

Who conducted this campaign? Was it the public employee unions? The human services community? Not at all. It was the Associated Industries of Massachusetts, the Massachusetts Taxpayers Foundation, the Greater Boston Chamber of Commerce and the Massachusetts Business Roundtable – all advocates for the state’s most powerful corporations and all once reliable advocates of low taxes.

This tax-hike epiphany by big business gave the state legislature the cover it needed to repeal a politically popular tax cut. And the effects did not end with the personal income tax. An emboldened legislature went on to cancel a charitable tax deduction, approved by an even larger majority of voters (and ironically also once championed by business), and a capital-gains tax cut, extracted by Governor Weld on the promise of a controversial legislative pay raise. In the end, the legislature raised taxes by $1.2 billion.

AIM, the Taxpayers Foundation and the others tried to justify their complicity in this tax hike by pointing to a state revenue crisis that threatened "core" state services. They promised that this tax hike would be "balanced" by spending cuts. Unsurprisingly, we got the tax hike, but spending continued to rise.

Now these same business groups are begging the legislature not to rescind their own cherished tax breaks. Suddenly now, low taxes -- as embodied in the single-sales-factor formula, the investment tax credit and the research and development tax credit -- are essential to state competitiveness.

The single-sales-factor formula was adopted in 1995 on the promise that it would keep manufacturing jobs from leaving the state. Since then manufacturing jobs have decreased by 17%.

AIM and the Taxpayers Foundation are still arguing nevertheless that these tax breaks are needed to preserve jobs. Their spokesmen are warning the legislature not to revive the state’s reputation as “Taxachusetts.”

Repealing all three tax breaks would cost state corporations about $300 million in new taxes. There is no word from business spokesmen about how last year’s tax increase, quadruple this size and enacted with their encouragement, has affected jobs or the state’s reputation.

Repealing the corporate tax breaks would, to be sure, cause economic harm. BHI has determined that it would cause business investment to shrink by $592 million or 1.23%. But the warnings about job losses are, to say the least, dubious. Indeed, our analysis shows that repeal would actually lead to the creation of a thousand or so new jobs.

AIM has commissioned studies to support its argument that there would be job losses. But given that the effect on jobs, plus or minus, is, by every account, small, we can now agree that none of the tax breaks is important for preserving jobs. We can also agree that canceling tax breaks beneficial to only a handful of special pleaders would inflict less economic damage than did the much larger tax hike enacted last year, which cut a wide swath through the state economy.

It appears that the tax breaks in question will temporarily survive the feverish efforts by the public employee unions to raise taxes. Ironically, the reason lies less with the efforts by AIM to prevent the repeal of corporate tax breaks than with a 2002 ballot measure that AIM and its allies opposed. The ballot measure would have abolished the state income tax and came close to being approved at the polls. It is this strong expression of anti-tax sentiment by the voters – and not AIM’s protestations – that is deterring the legislature from enacting any further tax hikes this year.

AIM and its allied groups are not out of the woods on this issue. The public employees unions and their favorites in the legislature are threatening to put higher business taxes back on the table in the fall. And the business community will get no credit from these quarters for siding with them over last year’s tax hike. Such are the wages of those who would ply a self-serving double standard.

Salvation, however, awaits those who would repent. The business community could still reclaim the moral and economic high ground by launching a new campaign, this one aimed at bringing about lower tax rates, corporate and personal, that would benefit all businesses, large and small.

The state already has plenty of advocates for higher taxes and bigger budgets. It's time once again for business to take care of business -- and the state economy.


David G. Tuerck, PhD, is chairman and professor of Economics at Suffolk University where he also serves as Executive Director of the Beacon Hill Institute for Public Policy Research.

This article appeared in the June 27, 2003 edition of the Boston Business Journal.

Format revised on 18 August, 2004