BHI FaxSheet: Information and Updates on Current Issues

Corporate Tax Proposal Would Mean More Jobs, Higher Wages for Massachusetts Workers

October 3, 1995

A proposed reduction in corporate taxes would, if applied to all Massachusetts corporations, create between 6,732 and 10,405 new jobs in Massachusetts and between $382 and $615 million in additional wages for Massachusetts workers. If applied only to manufacturing corporations, the same proposal would destroy between 2,350 and 3,446 jobs and reduce wages by between $144 and $222 million.

The "Act To Promote Job Growth in the Commonwealth," now before the state legislature, would change the corporate-tax apportionment formula to apply only to sales in Massachusetts, thus effectively lowering the tax rate on corporations with mainly out-of-state sales and in-state payroll and property. Currently, Massachusetts taxes corporations according to their payroll, property, and sales in Massachusetts. Some political leaders have suggested that they might support the proposal only if it is limited to the manufacturing corporations.

Using an econometric model developed for the purpose of analyzing proposed changes in state law tax, the Beacon Hill Institute has examined the "single-sales-factor" proposal, both as it would apply to all corporations and as it would apply only to manufacturing corporations. The results of its analysis are summarized in Table 1.

Table 1

Labor Market Effects Revenue Effects
  Change in Employment Change in Payroll Static Revenue Effect Dynamic Revenue Effect Net Revenue Effect
All Sectors 6,372 to 10,405 additional jobs $382 to $615 million in new wages $227 million revenue loss $23.3 to $37.7 million revenue gain $189.3 to $203.7 million revenue loss
Manufacturing only 2,350 to 3,446 fewer jobs $144 to $222 million in lost wages $162 million revenue loss $9.0 to $13.9 million revenue loss $171.0 to $175.9 million revenue loss

In addition to the effects on the jobs and wages, Table 1 shows the effects of the proposed tax cut on Massachusetts tax revenues. If applied to all sectors, the tax cut would produce a 1995 revenue loss of about $200 million. This revenue loss is the net result of two effects: (1) the "static" revenue loss - the loss computed on the assumption of no change in wages or capital spending and (2) the "dynamic" revenue gain - the revenue gained as a result of the increased wages and capital spending that the tax cut would bring about. If applied to the manufacturing only, the tax cut would produce a net loss of about $175 million in tax revenue.

The BHI model shows how changes in tax law affect the costs of labor and of capital to Massachusetts employers. It shows, at a high level of statistical confidence, that (1) by reducing the cost of labor, cuts in state income and payroll taxes encourage employers to create new jobs and (2) by reducing the cost of capital, cuts in state corporate taxes encourage them to engage in new capital spending.

A tax cut of the kind under consideration here exerts offsetting effects on the labor market. By encouraging corporations to locate Massachusetts or to expand-in-state production, it encourages them to create jobs and raise wages in Massachusetts. Conversely, by reducing the cost of capital relative to that of labor, it encourages "downsizing" and wage cuts.

That data show that, for a corporate tax cut applied to all Massachusetts sectors, the first effect will dominate, leading corporations, on balance, to create jobs and increase wages. For the same cut applied only to manufacturing, however, the second effect will dominate, leading the corporations to destroy jobs and reduce wages. This is consistent with the strand of economic theory that suggests that, while broadly based tax cuts lead to economic efficiency, narrowly based tax cuts are likely to have the opposite effect.

The data argue for broadly based tax cuts as a way of creating jobs in Massachusetts. They argue persuasively against offering tax cuts selectively as a way of keeping certain firms from leaving the state. Such tax cuts might have the opposite of the intended effect.

This BHI FaxSheet was prepared by David G. Tuerck, Ph.D., executive Director, with the assistance of In-Mee Baek, Ph.D., resident scholar and tax model project director, and of Kathleen M. Lang, Ph.D., research Associate. A detailed description of regression results and simulation methods is available from the institute on request. Contact Ellen F. Foley, director of communications, at 617-573-8750.

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Posted on April 6, 2000; HTML revised on April 13, 2005 2:41 PM