State runs out of excuses not to cut tax

The core issue, however, is not whether the state can afford the tax cut or how effectively it would stimulate the economy. The core issue is the value that the state - and the candidates - place on democracy.


by David Tuerck

September 13, 2006

What has most distinguished this year's primary season is the candidates' fixation on what should, in one sense, be the least important issue of the campaign: whether to cut the personal income tax rate from 5.3% to 5.0%. In 2000, the voters overwhelmingly supported a ballot measure to reduce the rate, then at 5.85%, in stages to 5.0%

In 2002, the legislature overturned this vote and froze the rate at 5.3% in response to a falloff in revenues owing to the economic slowdown then under way. The legislature also lowered the personal exemption, ditched a voter-approved charitable tax deduction and raised capital gains taxes. Now, with revenues flooding state coffers, candidates debate whether to let the income tax rate fall to 5.0% at once, or in stages, or whether to just keep the rate frozen where it is now. The revenue loss from the tax cut is estimated to be $675 million annually or about 2.6% of the budget.

Today 57% of expected Democratic primary voters support a reduction of the rate to 5.0%. There are, to be sure, influential voices claiming that the state cannot "afford" to sacrifice even this much revenue. But consider the following: In June 2005, the state approved the fiscal year 2006 budget on the expectation that tax revenues would be $17.3 billion for that fiscal year. In fact, FY 2006 revenues totaled $18.6 billion, representing a surplus of $1.3 billion. The tax cut at issue could have gone into effect on July 1, 2005 and the state would still have brought in about $529 million more revenue than it would have needed to meet its spending plans for the coming fiscal year.

The record for fiscal years 2003-05 is similar. The state has shown for four years running that it can afford this tax cut. Revenues have been growing at an average annual rate of 6.2% since FY 2002. If affordability is the issue, then we must ask, "If not now, when?"

Opponents of the tax cut like to point out how little it would add to disposable income (about $143 per household per year). But the same logic cuts the other way. Using the state surplus and limiting the annual growth of budget busters, the legislature could easily make up 2.6% of the budget without inflicting real pain. Cutting the tax would confer at least modest economic gains. According to our analysis, it would create almost 8,000 new jobs and add some $450 million annually to disposable incomes.

The core issue, however, is not whether the state can afford the tax cut or how effectively it would stimulate the economy. The core issue is the value that the state - and the candidates - place on democracy.

The usual argument is that the voters would never have approved the tax cut if they had anticipated the 2002 downturn or if they had understood the spending needs imposed by health care and education reform, unfunded pension liabilities, Big Dig disasters and the like. But this argument overlooks the possibility that the voters are intelligent enough to know that economic downturns will occur and that professed spending needs will always get larger and larger. Perhaps, in 2000, the voters meant to tell the legislature that it must learn to live with 5.0% through thick and thin and that if there is a downturn and if individual citizens must tighten their belts, then so must state government. Perhaps that's what they're telling the candidates now.

The voters, too, may see through the argument that the state continues to labor with a "structural" deficit that makes a tax cut fiscally irresponsible. This deficit is supposed to be the difference between what the state has to spend in order to meet current obligations and what it can expect to take in as revenue.

Perhaps, in enacting the 2000 tax cuts, the voters were telling the legislature that what it "has to spend" can be no more than what it can raise in revenue when the tax rate is set at 5.0%. Perhaps they were saying that if current obligations would require the legislature to spend more than that, then it is time to reduce current obligations.

Self-styled experts like to disdain the naive voter who would jeopardize "vital" programs just to save a few bucks in tax revenue. Perhaps the voters likewise disdain politicians who behave like petulant teenagers unable to live on an allowance. The difference is that it is the voters, not the experts or the politicians, who have the votes.


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 September 13, 2006 edition of the Boston Herald.