bannergifinrootfolder

 

 

BHI FaxSheet: Information and Updates on Current Issues

The Weld-Cellucci tax plan: An antidote for federal tax hikes

August 1993


A tax-cut proposal now before the Massachusetts legislature would add more than $670 million in new production and almost 21,000 new jobs to the Massachusetts economy. Yet, the proposal might not be adopted unless the state legislature, already nervous about a possible FY-94 deficit, finds a way to cut the state budget. Without knowing what to cut and why, the legislature might find the state's economy too weak and the national policy climate too uncertain to pass a tax cut aimed at making the state's economy stronger. However, the Beacon Hill Institute has found that the state can cut expenditures by enough to finance the loss in revenues and, at the same time, generate significant, identifiable economic benefits.

On August 11, Governor William Weld condemned the Clinton tax increases as threatening the state's economic recovery. "The new job-killing taxes from Washington are seizing close to $1 billion a year from the fragile Massachusetts economy, just as we are starting to recover from the recession," said the governor. As an antidote, he and Lt. Governor Paul Cellucci proposed cuts in income and gasoline excise taxes that would free "more than $200 million for the private sector to invest in the growth of our economy." Specifically, they proposed to:
  • cut the state excise tax on gasoline by 4.3 cents per gallon;
  • cut the state tax on earned income from 5.95% to 5.85%;
  • increase the exemption for filers age 65 and over on Massachusetts bank interest (from $200 to $2,400 for married filers and from $100 to $1,200 for single filers);
  • raise the no-tax-status threshold (from $12,000 to $13,500 for married filers and from $8,000 to $9,000 for single filers).

Under the Weld-Cellucci proposal, the gasoline-tax reduction would take effect on October 1, 1993 and the income tax provisions on January 1, 1994. For FY 94, the administration estimates a "static" revenue loss (revenue loss calculated without consideration of the stimulative effects of the tax cut on economic activity) of $124 million. The tax would be only partially in effect in FY 94. The "fully annualized" static revenue loss is $207 million.

Economic Effects

Using its dynamic econometric tax-analysis model of the Massachusetts economy, the Beacon Hill Institute has estimated the economic effects of the proposal. Table 1 indicates that, when fully implemented, the tax cut would cause Massachusetts production to rise by an estimated $678 million and would, in the process, lead to the creation of an estimated 20,827 new jobs. The tax cut would stimulate an initial rise of $1,596 million in net nonresidential investment and would stimulate a permanent rise of $33 million in net nonresidential investment and of $175 million in gross nonresidential investment.

Table 1
Economic Effects of the Weld-Cellucci Tax Cut


Implementation of
Tax Cut
Rise in Production
New Jobs
Initial Rise in Net Investment
Permanent Rise in Net Investment
Permanent Rise in Gross Investment
Partial (FY94 only) $397 million 11,858 $934 million $19 million $102 million
Full (fully annualized) $678 million 20,827 $1,596 million $33 million $175 million

Deficit Dangers

Critics of the proposal are correct in pointing out that the FY-94 budget is already in danger of running a deficit. The budget approved by the governor and by the legislature assumes that the state will receive tax revenues in the amount of $10,540 million. BHI currently estimates that FY-94 revenues will reach only $10,345 million. (See Table 2.) Given nontax revenues of $5,175 million and expected total expenditures of $15,578 (including only those increases in supplemental spending needed to cover existing, unfunded mandates and collective bargaining obligations), the state faces a FY-94 deficit of $58 million. Allowing for a "dynamic" revenue gain of $15 million attributable to the stimulative effects of the tax-cut proposal, the state would have to cut expenditures by $167 million in FY 94 in order to adopt the proposal and balance the already-unbalanced budget.

 

Table 2
Budget Implications of the Weld Tax Cut
($ millions)
REVENUES  
BHI Tax-Revenue Forecast 10,345
Nontax Revenue 5,175
Total Revenues 15,520
Expenditures  
Budgeted Expenditures as of August 24,1993 15,523
Unfunded Mandates and Collective Bargaining Obligations 55
Total Expenditures 15,578
Budget Deficit before Tax Cut 58
Static Revenue Loss from Tax Cut 124
Budget Deficit after Tax Cut (static estimate) 182
Dynamic Revenue Gain from Tax Cut 15
Required spending Cut 167

"Financing" the Deficit

Fortunately, however, it is possible for the state to finance the expected deficit. This is because of the relatively small size of the spending reduction that is required and because of the considerable amount of room for cutting that the state budget still offers. Table 3 identifies 9 items totaling $167 million that could be cut without an overly painful reduction in state services. Items 1-7 are cuts (or are based on cuts) that were proposed by the administration for the purpose of funding the 1993 Education Reform Act but that were never implemented. Items 8-9 are cuts that could, in BHI's judgment, be made without serious negative effects on services. The SHARP program (item 8) does not, in our view, make a significant contribution to the supply of low-income housing. The state spends more than $700 million on higher education and on the administration of constitutional offices and secretariats. Consolidation of educational services and of state offices would make the cut suggested here (item 9) relatively easy to absorb.


The spending cuts suggested in Table 3 would be sufficient to finance the "partial" tax cut slated for FY 94. Full implementation of the proposal would increase the static revenue shortfall by $83 million (from $124 million to $207 million). Of this amount, $7 million could be recouped through "dynamic" revenue gains and the remainder through normal, expected FY-95 revenue growth. Indeed, FY-95 revenues will be high enough to finance an even larger tax cut.

Table 3
Suggested Budget Cuts
($ millions)
1 Reduce State Assistance to MBTA. Require retirees to contribute 10% to their health insurance, and limit tort liability to $100,000. 13
2 Adopt "Fair Labor Standards Act of 1935." Reduce state overtime charges by adopting the Act's overtime standards. 6
3 Create a Brokered Transportation Program. Centralize and coordinate transportation across agencies on a regional basis. 8
4 Amend Medical Leave of Absence Policy. Reduce from seven to four days the period of time for which nursing homes are reimbursed for patients who have been transferred to an acute hospital. 3
5 Adjust Reimbursement of Private Chronic Care Hospitals. Reduce reimbursement to reflect level of care actually provided. 10
6 Rescind Seven-Percent State Employee Pay Raise Effective September 1, 1994. 78
7 Change Standards for Chapter 766 (Special Education) Required Services. By changing the Massachusetts standard of "maximum feasible benefit" to the national norm of "free and appropriate services," the state will reduce the amount of state aid that is needed for cities and towns to meet their special-education requirements 20
8 Abolish the SHARP Program. Conduct initial phase-out by eliminating housing subsidies to developers. 9
9 Cut Higher Education Budget and State Administrative Budgets. Consolidate programs as needed to achieve cost saving. 20
  Total Suggested Budget Cuts 167

Many observers consider the Weld/Cellucci proposal to be a political ploy, not worth taking seriously. This analysis suggests, instead, that the administration has offered an effective and easy-to-swallow antidote to federal tax hikes.

footer