Sharp dividend: Proposed tax cuts mean more jobs, wages

Volume 1, Number 4 Summer 1997

Sharp dividend: Proposed tax cuts mean more jobs, wages

From NewsLink, Volume 1, No.4, Summer 1997

Cutting the tax rate on earned income in Massachusetts from 5.95 percent to 5 percent, an idea recently proposed by Acting Governor A. Paul Cellucci, State Treasurer Joseph A. Malone and Citizens for Limited Taxation & Government, (CLT&G) would exert a powerful boost to the state's economy.

The Beacon Hill Institute's State Tax Analysis Modeling Program (STAMP) shows that, if implemented immediately, the cut would create more than 96,000 new jobs and increase the state capital stock by more than $13 billion. In addition, the state's annual payrolls would grow by $5.6 billion. Taking these "dynamic" economic effects into consideration, the tax cut would cost the Treasury approximately $789 million per year.

CLT&G has offered three proposals, one of which is expected to appear on the 1998 ballot as an initiative petition. All three would roll back the present tax to 5.6 percent in 1999; to 5.3 percent in 2000 and finally to 5 percent in 2001. Governor Cellucci's bill would bring the rates down one year earlier.

The CLT&G petition was endorsed by Treasurer Malone and Governor Cellucci in July. The state Attorney General is currently determining whether the initiatives pass constitutional muster.

The new proposals are reviving a tax policy debate last seen in 1990, when voters considered and ultimately rejected a proposed $2 billion tax cut. While the state's economy was in a deep recession then, the latest call for tax-rate cuts comes at a time when the state coffers are awash with tax revenues. Treasurer Malone has estimated the FY 97 surplus to be from $535 to $685 million.

Encouraged by new revenues, the legislature is considering ways to spend money on capital projects - money in excess of the extra funds set aside by law in the state's rainy day fund. In fact, state spending over the last eight years has exceeded inflation for the same period. (See "FY '98 state budget: Drumming up spending," NewsLink, Spring 97). In late August, House Speaker Thomas Finneran signalled that he would consider a tax-rate cut this fall.

While there is an overarching concern that state government needs the revenue to meet previous spending commitments, the growth in revenues and surpluses are proof that it's time for a tax cut. A surplus is not a sign of success but rather a sign that government is perpetuating the disincentives created by tax revenues over and above spending.

Resources absorbed into government supported activities - whether it be convention centers, pay raises, the Big Dig or any new-found legislative priority - are resources diverted from other activities that create jobs, raise wages and increase capital spending.

As the debate escalates, some opponents are saying that cutting taxes would be a "mistake" particularly if the state runs into a recession. At that point a governor would, as in 1989, be required to raise taxes to fund "popular" programs such as education reform and the state's contribution to the Central Artery/Tunnel project.

But the real mistake would be to allow state spending to grow at the expense of job creation. A tax-rate cut would expand the economy by creating incentives for employers to create new jobs.

The recent moves to cut the tax rate are an acknowledgment that state government cannot continue to obstruct the potential for a growing Massachusetts economy in good times and bad.

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