For Immediate Release:
Thursday, April 4, 2002
12 p.m.

Frank Conte
Director, Communications & IS
617-573-8750; 617-573-8050

Tax hikes to bridge budget gap would hurt state economy, says BHI study

A new study by the Beacon Hill Institute at Suffolk University shows that proposed tax increases aimed at reducing the state deficit would cost thousands of jobs, hundreds of millions of dollars in capital pending and billions of dollars in lost payrolls.

The new study, Holding Taxachusetts at Bay, details the economic consequences of major tax hikes that are under consideration by the state legislature and that have been embraced by a number of candidates for governor. The report was delivered to Acting Governor Jane Swift last month.

The tax hikes and their estimated 2003 effects are:

Raise the personal income tax rate from 5 percent to 5.3 percent. This would raise $414 million in new revenue, after the resulting shrinkage in the economy is taken into account. The first-year cost:
- 32,000 lost jobs,
- $1.4 billion in lost wages, and
- $244 million in lost spending on capital (e.g., factories, factory equipment, offices and business computers).

Raise the personal income tax rate from 5 percent to 5.6 percent, as suggested by the chairman of the House Ways and Means Committee. This would raise $820 million. The cost:
- 63,000 lost jobs,
- $2.8 billion in lost wages, and
- $487 million in lost capital spending.

Halve the personal tax exemption. This would raise $508 million in new revenue. The cost:
- 39,000 lost jobs,
- $1.8 billion in lost wages,
- $300 million in lost capital spending, and
- the imposition of a highly regressive tax on income.

Raise the tax on long-term capital gains by $80 million. Given the resulting shrinkage in the economy, this tax hike would raise only $69 million. The cost:
- $928 million in lost capital spending, and the imposition of another highly regressive tax.

All the tax hikes would, as shown, exert negative effects on the state economy. A rise in the capital gains tax, purported to favor the poor, would discriminate most against the lowest income earners. Taxpayers with an income less than $20,000 per year who report capital gains and losses would experience a 0.22-percentage-point increase in their tax rates, while taxpayers with an income of $200,000 a year or more would experience a 0.16%-percentage-point increase in their tax rates.

How might the Commonwealth’s shortfall be funded without hampering its economy? As part of its analysis, BHI suggests that Massachusetts could:

Use the rainy day fund to cover the total four-year shortfall. This would leave $412 million in reserves as of the beginning of FY2006, when the budget is expected to move back into balance. Reserve funds were established to tide the state over tough times. They should not be untouchable.

Restrain spending. Although this is a limited option for this the remaining few months of FY2002, the legislature should revisit the growth in spending over the last decade by adopting Acting Governor Jane Swift’s budget. This means level funding the FY2003 budget. It also means taking a closer look at Medicaid, a perennial “budget buster”, that is projected to increase by $542 million.

Faced with the recession of the early 1990s, Massachusetts raised taxes sharply. BHI has determined that this increase in taxes was responsible for 117,000 of the 267,000 jobs lost over the course of that recession.

“Clearly, it is important to avoid the same mistake this time around,” says David G. Tuerck, BHI Executive Director. “The current budgetary ‘crisis’ is a short-term problem, solvable through judicious use of reserves and adjustments in spending. Raising taxes would impose permanent harm and, in doing so, limit the state’s ability to sustain a high standard of living for its residents.”

BHI used Mass-STAMP (Massachusetts State Tax Analysis Modeling Program) to perform the estimates reported in the study. A complete copy of the study can be obtained from the Institute’s web site at


The study may be obtained by calling 617-573-8750 or writing an e-mail to


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