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Massachusetts Personal Income Tax Cut Would Mean More Jobs, Increased Wages

February 1996

Governor William F. Weld has proposed a reduction in the Massachusetts personal income tax rate from 5.95 percent to 5.45 percent. The Beacon Hill Institute econometric tax model shows that the proposal would create 65,600 new jobs, increase capital spending by about $4.8 billion and increase annual wages of Massachusetts workers by an amount ranging from $2.2 to $3.2 billion. The state would lose between $328 and $382 million annually in tax revenue.

The tax cut is offered as part of a proposal to downsize state government. The proposal, now before the legislature, consists of eight reorganization plans and 33 pieces of legislation. It would shed 7,500 jobs, five cabinet secretariats, 74 agencies and 100 boards and commissions and is predicted to save $600 million in government expenditures. The proposal phases in the personal income tax cut over the next calendar year, with the rate going down to 5.70 percent on January 1, 1997 and reduced to 5.45 percent on January 1, 1998.

Critics question whether the state can "afford" the tax-revenue loss that would result from the proposal's adoption, citing an estimate that the tax cut would cause the state to lose about $500 million in tax revenue. If the proposed downsizing yielded savings substantially less than the promised $600 million, Massachusetts would be forced either to run a deficit or to cut spending on other programs.

In fact, the tax-revenue loss would be substantially less than feared by critics. The reason is that $500 million is a "static" estimate made on the assumption that, under the tax cut, there would be no expansion in employment and wages and that the tax base would therefore remain frozen at its current level of about $100 billion.

Contrary to this pessimistic view, the BHI model shows that the lower tax rate would cause employment and wages, and thus the tax base, to expand. When the resulting "dynamic" tax-revenue gain, ranging from $118 million to $172 million, is taken into account, the actual tax-revenue loss turns out to be substantially less than $500 million.

The BHI model shows how the proposed tax cut would reduce the cost to employers of retaining and attracting workers and thus induce employers to create new jobs and to engage in new capital spending. A detailed description of the model is available on request from the Beacon Hill Institute. Table 1 summarizes its results.


Table 1
Economic Effects of the Weld Tax Cut

Number of new jobs 65,600
Rise in total wages $2.2 to $3.2 billion
New capital spending $4.8 billion
"Static" tax-revenue loss $500 million
"Dynamic" tax-revenue gain $118 to $172 million
Actual tax-revenue loss $328 to $382 million

Revised on 06/27/2002: HTML format revised on 11-Jul-2007 2:23 PM