Undoing budget progress: Moves please businesses, not taxpayers

by David Tuerck

September 29, 2002.

On April 9, 2002, four Massachusetts business groups - Associated Industries of Massachusetts, the Greater Boston Chamber of Commerce, the Massachusetts Business Roundtable and the Massachusetts Taxpayers Foundation - issued a statement warning of a "$ 2 billion budget gap for fiscal 2003." To fill this gap, they offered a three-part plan, under which the state would draw on: (1) $ 700 million in spending cuts, (2) $ 700 million in new taxes and (3) $ 500 million in funds taken from reserves.

Previously, Massachusetts business spoke largely with a single voice in favor of cutting taxes. As a result of steadfast efforts from this quarter, the state went a long way toward reversing its reputation as Taxachusetts. This process culminated two years ago in voter approval, by an 18-point margin, of ballot Question 4, which cut the personal income tax from 5.85 percent to 5 percent. The impetus for previous tax cuts, particularly cuts in corporate taxes, came largely from the corporate sector. Question 4 succeeded as the result of a grassroots movement to cut taxes for individuals and small business. Its passage represented a broadening consensus for lower taxes.

The April 9 statement fractured this consensus by putting Question 4 on the chopping block. The groups signing it essentially volunteered to sacrifice the tax cut least important to them in order to keep intact their own hard-won tax breaks. Among these is the single-sales-factor formula for computing corporate taxes, from which certain corporations benefit.

Now that we have a 2003 budget, it is worth asking whether the budget actually adopted mirrored the three-part balanced approach proposed on April 9.

As for tax increases, the business groups got what they asked for and then some. The Legislature raised taxes, but by $ 1.141 billion, not $ 700 million. It used $ 900 million, not $ 500 million, in reserves to settle the fiscal 2003 deficit.

What the Legislature didn't do was cut spending. Instead, it increased spending from $ 22.8 billion in fiscal 2002 to $ 23.1 billion in fiscal 2003. The three-part plan became a two-part reality.

Surprisingly, the four business groups appear pleased with this outcome. On Aug. 20, the Massachusetts Taxpayers Foundation praised state leaders for their efforts to resolve the crisis that supposedly necessitated this tax increase. It described a combination of new revenues and spending cuts that were adopted for 2003 as a major accomplishment. The other signatories seem equally pleased.

The Taxpayers Foundation adamantly defends the tax-hike portion of the package. It challenges those who have argued against tax increases to present any credible plan to permanently fill a $ 3 billion budget deficit.

It is, in fact, a simple task to come up with a credible plan that would have funded the 2003 budget without raising taxes. Had it not raised taxes, the state would have run a deficit of $ 2.067 billion in this fiscal year. It could have made up this deficit by drawing on $ 1.243 billion of the $ 2.044 billion in reserves available at the end of fiscal 2002, reducing lottery prizes by $ 274 million and securing a portion of future tobacco revenues for another $ 550 million.

This plan would have permitted the state to increase spending, gradually at first and then more rapidly, as revenues recovered. Beginning in fiscal 2006, it would have been able to increase spending by 3 percent annually, slightly faster than the expected rate of inflation. And all without a tax hike.

It seems, from this perspective, that, rather than raising taxes, the Legislature could have honored the voters and limited the growth of spending for a few years as the revenue crisis passed. Instead, it took advantage of the political cover offered to it by the business community and overrode the express wishes of the voters to cut taxes.

The Legislature didn't stop with raising the personal income tax but also raised capital gains taxes and negated a charitable tax deduction championed by the financial services industry. There is talk of raising the income tax still higher and of withdrawing the single-sales-factor privilege.

The April 9 signers bet that, by going along with a tax hike that overrode the wishes of the votering public, they could keep their own prized tax breaks. But they made a losing bet. Never mind the positive spin coming from the Taxpayers Foundation and others. The business community is about to discover the Faustian consequences of bargaining with the Massachusetts Legislature.

David 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 Sunday Herald on September 29, 2002.