budget progress: Moves please businesses, not taxpayers
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.
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.
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
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.
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.
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.
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.
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
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.
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.
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.
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
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.
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.
revised on 18 August, 2004