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from NewsLink, Vol. 4, No. 1, Fall 1999
The recently-passed legislative tax-cut offers fewer benefits to the Massachusetts economy than one proposed by supporters of a prospective ta- cut initiative petition, according to new analysis by the Beacon Hill Institute.
After months of delay, the legislature approved and Governor A. Paul Cellucci signed a tax cut that will cut the state's earned income tax rate from the current 5.95% to 5.75% over a three-year period. The rate cut is the first in nine years.
Governor Cellucci's original proposal, which was rejected by the House and Senate, also sought to reduce the tax rate over a three-year period. A ballot drive is now underway that would reduce the rate to 5%.
Compared with a reduction to 5%, the new legislative tax cut will exert a relatively weak effect on the economy and confer only a small fraction of the benefits.
BHI analysis found that the recently approved tax cut will create 19,000 jobs and $252 million in additional capital stock by the year 2002 and will increase payroll by $925 million. It will cost the state treasury $260 million per year in revenue.
In contrast, a proposal to cut the earned income tax rate to 5% would be almost five times as powerful. When fully implemented by the year 2002, it would raise employment by 93,000, increase the capital stock by $1.2 billion and boost payroll spending $4.4 billion. The reduction in state revenues would be $1.26 billion, or about 6% of current state revenue.
A tax cut cannot be evaluated just in terms of what it gives back to taxpayers or of which taxpayers will benefit. It must be evaluated, also, in terms of how it affects the overall economy. If the proposal to cut the tax rate to 5% makes it to the state ballot next year, voters may choose a more expansive approach to cutting tax rates and one that could confer far greater benefits to the state's economy.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2002. All rights reserved.
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