Loving Taxachusetts

"Massachusetts has some of the best entrepreneurs, scientists and managers in the country. If we pass the grad tax, we will make it easier for other states, especially those that are in the process of cutting their taxes, to lure away this talent." .



David G. Tuerck
November 1994

Massachusetts has come a long way since the tax-and-spend days of the Dukakis administration. Gov. William Weld, up for re-election this year, proudly reports his success in balancing the state budget, privatizing government services and cutting estate and business taxes.

Two questions on the November ballot show, however, that the crowd that gave us the label "Taxachusetts" is still a force to be reckoned with. Question 6 would amend the constitution to scrap the existing "flat" tax and put it in its place a graduated or progressive income tax. Question 7 would implement Question 6 by imposing a new graduated rate structure, rising, for married filers, from 5.5 percent on the first $81,000 of income to 9.8 percent on income above $150,000.

The idea of imposing a graduated income tax may seem unremarkable. It turns out, however, that the Massachusetts income tax is already highly progressive (in part because of a generous no-tax threshold). Questions 6 and 7 would simply make the existing tax, already the highest flat tax in the country, even more progressive, giving the state the eighth-highest top tax rate in the country and the third-highest bottom rate. With Mr. Weld's re-election almost assured, the grad tax is, after the race for Ted Kennedy's Senate seat, this year's hottest ballot issue.

The campaign for the grad tax is led by a public-employee advocacy group that poses as a champion of the middle class. The campaign against is led by a coalition of businesses inclined to see Question 6 and 7 as putting the legislative fox in charge of the tax-code chicken coop.

Former Senator Paul Tsongas decries the grad-tax battle as an unnecessary and embarrassing "tong war" that has dashed any hope for genuine and badly-needed tax reform. Some blame proponents for this state of affairs. Others blame the "selfish" wealthy, who would deny everyone else a tax break. But a more realistic assessment puts the blame elsewhere - on the state's declining competitiveness, combined with and ostrich-like refusal on the part its intellectual elite to see high taxes as a cause of its problems.

A well-known local columnist recently wrote an article entitled, "State of Decline: Is Massachusetts sliding into mediocrity?" Observing that Massachusetts has lost two-thirds of its large manufacturers since 1988 and suffered an 11.3 percent decrease in employment over the 1989-92 contraction, this writer concludes that the blame lies with "whiny" businessmen and "nonresponsive" government. The solution? More spending for the environment and for "diversity." There is no mention of the 19 percent increase in the state tax on earned income that has taken place since 1989.

As for the grad tax, a "tong war" it is. Proponents run commercials demonizing CEOs who voice their opposition. Arguments that the grad tax would hurt business or the economy are branded "lies." A conservative state legislator has compared the tax to bolshevism.

"Opportunism" would be a better word. It is voter innocence, not ideology, that grad-tax proponents are exploiting. They claim that the grad tax wouldn't effect business (even though anyone with a state tax return can see that unincorporated businesses would be subject to the new rate structure). Then they claim that most businesses would pay lower taxes under the grad tax (even though most business income is reported by taxpayers subject to the higher rates imposed by the grad tax).

Proponents freely claim that the grad tax would cut taxes in 1995 for 92 percent of the public, even though the correct number is easily computed to be about 78 percent and even though rising living standards would cause this number to decline rapidly in the future years. They also ignore the Draconian marriage penalty that the grad tax would impose.

Probably the biggest embarrassment to the state in all this is the proponents' repeated mention of a report by Mr. Weld's "own Department of Revenue" supposedly showing the grad tax to be "revenue neutral." What the report shows, however, is its authors' confessing that their "Dynamic Analysis Model... was not designed to forecast the dynamic economic impacts" of the grad tax. To estimate revenue effects, the authors had to fall back on a static analysis, which assumes that the state could tax income at 100 percent without inducing taxpayers to change their economic behavior by one iota. Unsurprisingly, the report shows the grad tax as exerting only a small effect on revenues.

The report's authors make it clear that they have to leave "unresolved" the question of the grad tax's behavioral effects. Disregarding this fine print, grad tax proponents trumpet the report as promising a free lunch: lower taxes for almost everyone, and not one penny less in tax revenues or government "services." Mr. Weld, a self-styled "filthy supply-sider," has been understandably quiet.

When behavioral effects are revealed, the free lunch disappears. The grad tax would raise the average marginal tax rate on earned income by 17 percent. The ensuing increase in labor costs and decrease in employer demand would cause the state to lose about 78,000 jobs, $87.5 million in tax revenue and $1.2 billion in wages in 1995 alone. Some jobs would disappear because of the increased cost of retaining high-wage workers in demand by other states.

Massachusetts has some of the best entrepreneurs, scientists and managers in the country. If we pass the grad tax, we will make it easier for other states, especially those that are in the process of cutting their taxes, to lure away this talent. That way, people outside of Massachusetts who don't much like our politics should find it easy to love our taxes.

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 WashingtonTimes on November 4, 1994.

Format revised on June 30, 2005 2:48 PM



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