NEWSLINK, V2N3 Spring 1998: Candidates: We are all tax-cutters now

With former Boston Mayor Raymond L. Flynn's exit from the Governor's race, this year's candidates can claim, "We are all tax-cutters now."

In an age of budget surpluses and interstate competition, candidates are hard pressed not to favor cutting taxes.

The context of the tax-cutting fervor is easy to identify. This year, Massachusetts is sitting on a $1 billion budget surplus. The bonds that were issued to address 1980s overspending have been paid off. The state's economy is strong, as is consumer confidence. Unemployment is only 2.9%, with stories in the media about labor shortages.

"We gave our word that this was a temporary tax, and I believe government should keep its word," says former state Senator Patricia McGovern, who served as Ways and Means chairman.

The four other candidates, acting Governor A. Paul Cellucci, Treasurer Joseph D. Malone, Attorney General Scott Harshbarger and former Congressman Brian J. Donnelly, apparently agree that some money should be returned to the taxpayers.

Although they offer different timetables and targets, all support rolling back the tax rate on earned income from its present 5.95%. In addition, all except McGovern support rolling back the 12% tax rate on investment income, which is the highest in the nation.

While the two Republican candidates favor scheduled tax cuts over a three-year period, the Democrats' plans include "triggers" based on the growth of unemployment (McGovern) and revenue growth (Harshbarger). In 2001, Donnelly would have a legislative commission study the affordability of a deeper cut beyond his target of 5.7%.

BHI analyzed the candidates' tax plans using its State Tax Analysis Modeling Program, STAMP, which shows how reductions in the tax on earned income generate job and capital formation.

While some candidates offer plans that increase personal exemptions or deductions, the most effective way to provide a stimulus is to cut marginal tax rates. When the state government cuts marginal tax rates, it increases the incentive to work and create capital. Some candidates, emphasizing "fairness" or the needs of "working families," prefer increasing personal exemptions or tax deductions.

Harshbarger's plan is, for example, the most expensive, costing $2.298 billion in tax revenue. Yet, because he would cut marginal tax rates by less than Cellucci, Malone or McGovern, his plan would sacrifice more in tax revenue while creating less in economic benefits.

Tax proposals should not be analyzed in isolation from a consideration of expenditures. Although the Cellucci and Malone plans are similar, Malone has pledged to hold state spending to the rate of inflation, about 2.5%, while Cellucci has not proposed a fixed limit on state spending.

The McGovern, Malone and Cellucci plans have the greatest effect on jobs (105,315), payroll ($4.87 billion) and capital stock (20.74 billion).

The McGovern plan appears to generate the same economic benefits at a lower cost in revenue. Because, however, our estimates ignore the economic benefits that would stem from cutting the tax on unearned income, they also probably understate the benefits from the Malone and Cellucci plans. The McGovern plan is not directly comparable also because it hinges the tax cuts on the unemployment rate.

In preparation for this article, Visting Assistant Professor James Fetzer conducted the simulations comparing all the competing tax cut plans using BHI's STAMP model.

Candidates for Governor: "We're all tax-cutters now!"