Governor Cellucci tax cut: Right on the money
Once again, Massachusetts
is at a fork in the road. Sometime over the next several days,
the state legislature will make a fundamental choice concerning
the fiscal and economic future of the Commonwealth. That future
will depend on whether the legislature adopts a tax proposal offered
by Governor Paul Cellucci or adopts instead some compromise version
of tax proposals offered by the House and Senate leadership.
The Governor wants
to reduce the state income tax rate from 5.95% to 5% over the three-year
period ending in fiscal year 2002. We have heard a good deal
so far about whether the state can "afford" these tax
cuts. But that misses the real story. When fully implemented,
the Governor’s plan would save state taxpayers about $1.3
billion annually in taxes. That means about $430 per year in each
Also ignored are
the benefits to the state's economy. In addition to the immediate
savings to taxpayers, a tax cut of that magnitude would confer substantial,
measurable benefits on the state. The Beacon Hill Institute
estimates that the tax cut would create about 86,000 new jobs, expand
payrolls by about $3.9 billion and add about $710 million worth
of factories, machines, computers, office space and other equipment
and structures that make up the state’s stock of physical
This is basic economics
at work here. Lowering taxes reduces the cost of labor to
Massachusetts firms. This enables businesses in Massachusetts
to compete more effectively.
What would a tax
cut of this size "cost" in terms of state tax revenues?
When the economic benefits are accounted for, Massachusetts would
lose just over a billion dollars in revenue, which amounts to about
5% of the state budget.
For the last several
years, the rapid growth of the state economy has created surpluses
that have run between $600 million and a billion dollars.
This year's surplus could be as high as $500 million. And
that's despite major tax cuts enacted last year.
If the economy continues
to grow as it has for the past several years (which the Governor's
tax cut would help it do), then the state could pay for about half
the tax cut out of the surplus and about half by cutting spending.
The leading alternatives
to the Governor's proposal are anemic in comparison. The House
would cut the income tax rate only to 5.75%. The Senate wouldn't
cut the tax rate at all. Instead, it would expand childcare
tax deductions, offer tax credits to seniors, double the exemption
available under the earned income tax credit and double the deductibility
of rental expenses. Both the House and the Senate would rescind
a capital gains tax cut promised in earlier legislation.
As for economic
benefits, the House proposal would confer only a small fraction
of those offered by the Governor's proposal. The Senate's
proposal offers absolutely no stimulus to the economy.
the capital gains tax cut would exert a substantial negative effect
on the economy, causing businesses to cut their capital spending
by about $921 million and local governments to lose about $9 million
in property tax revenues. Most significantly, it would be
viewed as a double cross to investors who made decisions to hold
assets for six years on the expectation that the rate would be cut
to zero as promised.
So why would any
taxpayer support the House or Senate proposal over the Governor's?
Some observers worry that a downturn in the economy would turn the
surplus into a deficit and thus make the tax cut even less affordable.
But the state is
sitting on a billion dollar rainy day fund that exists to meet just
such an emergency. And, anyway, why would we want to keep
taxes high in an economic downturn? A billion dollar tax cut
might be exactly the right medicine should the economy weaken.
stems from the state's supposed infrastructure crisis. Billions
of dollars in state capital projects go unfunded, it is said, because
of the Big Dig and because of a self-imposed limit on state borrowing.
But it is unreasonable
to expect taxpayers to carry this burden alone. There are
other places to look to save money, among them public transit and
education, both of which are oversubsidized.
A tax cut cannot
be evaluated just in terms of what it gives back to taxpayers or
of which taxpayers will benefit. It must be evaluated, also,
in term of how it affects the overall economy. By cutting
the income tax rate and by implementing the already promised cut
in capital gains taxes, the Governor's proposal confers the broadest
and most substantial benefits on the economy.
In view of
the magnitude of those benefits, the question is whether we can
afford not to take the proven path of lower taxes and increased
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
This article appeared in the June
23, 1999 edition of the Boston Herald.
Format revised on 18 August, 2004