Contract is good for New England
David G. Tuerck
Whether the Contract with America in good
for New England depends as much on how New England responds to its
implementation as it does on the contract itself.
New England is characterized by high labor
and utility costs, high federal, state and local taxes, high per-capita
income and a propensity to sink into severe economic downturns.
To this extent, the Contract is a pretty good deal for New England.
Consider, for example, our federal tax burden.
According to the Northeast Midwest Institute, New England gets back
90 cents in federal spending for every tax dollar sent to Washington.
That's slightly more than the Mid-Atlantic and Midwestern states,
but substantially less than the 32 states that make up the South
and the West.
Using the Institute's calculations, the fraction
of federal spending that ends up in the pockets of New Englanders
is about 5.6 percent. If, then, Congress were to adopt the contract-spawned
House budget proposal, New England would lose 5.6 percent of $1.4
trillion in federal spending over the next seven years or $78.8
billion. Given a 90 percent return on federal tax dollars, that
translates into $87.11 billion in taxes eventually avoided, for
a net saving of $8.71 billion.
The federal government represents a bad deal
for New England insofar as we pay more in federal taxes per capita
- about $1,000 over the national average - than any other region.
This is a result of being the region with the highest per-capita
For the United States as a whole, 9.5 percent
of households had incomes exceeding $75,000 in 1989. For New England,
the figure was 13.7 percent, the highest of any region. For Massachusetts,
the figure was about 14.6 percent. When critics of the contract
and of the House tax-cut proposals complain about tax cuts for the
rich, they are therefore complaining in particular about tax cuts
for New Englanders.
More important than these distributional
consequences, however, are the federal marginal tax rates that New
Englanders incur, thanks to their high incomes and to the graduated
federal rate structure. According to the Tax Foundation, Connecticut
has the country's highest average marginal income tax rate, at 27.3
percent. Massachusetts ranks seventh, at 25.7 percent. The result
is that for the region's two largest states, a smaller federal government
translates into a reduced federal income-tax penalty on work and
|Massachusetts ranks sixth in terms of
state and local taxes per capita. If Massachusetts reacts
to the contract by raising taxes, in all likelihood we will
further impair our tax competitiveness and hence our ability
to attract jobs and capital.
Certainly there is pain for New England
in the House and Senate budget proposals. We will miss the Amtrak
subsidies and the job training and highway funds. But we won't much
miss the agricultural price supports or the TVA subsidies. Indeed,
the proposed cuts in both will benefit New England. Food prices
will fall and the ability of states served by TVA to lure away New
England manufacturers with lower utility rates.
What is good for the country is generally
good for New England. Reducing capital gains taxes and the alternative
minimum tax and allowing accelerated tax write-offs for investment
will reduce the cost of capital and encourage investment. That's
good for the country and for New England's venture capital and manufacturing
industries. Balancing the budget is good for U.S. competitiveness
and for New England's sluggish export growth. Protecting defense
from further cuts is good for our defense industry.
U.S. Treasury officials have estimated that
New England will lose as much as $19 billion annually in federal
grants and other spending as a result of Contract cuts. The same
U.S. Treasury officials warn that, because of the federal money
that they will lose under the contract, the states will have to
enact massive tax increases to make up the difference. In other
words, we should enact at the state level the very taxes that the
contract aims to avoid or reduce at the federal level.
The states, particularly Massachusetts, should
not cave in to this pressure. Massachusetts ranks sixth in terms
of state and local taxes per capita. If Massachusetts reacts to
the contract by raising taxes, in all likelihood we will further
impair our tax competitiveness and hence our ability to attract
jobs and capital.
It is safe to say, therefore, that the contract
has set in motion a process that will lead to a balancing of the
federal budget and that will, too boot, confer differential benefits
on this region. All that remains for us is to resist the inevitable
pressure to turn New England in general and Massachusetts in particular
into a showcase for the failed national polices that the contract
seeks to reverse.
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
Boston Business Journal.
Format revised on August 18, 2004