For Immediate Release
March 29, 1998
Director of Communications
New economic analysis shows impact of tax proposals
Boston, March 29, 1998 - A new economic analysis of three tax proposals before the Massachusetts Legislature shows that each would exert widely different effects on the state's economy. The Beacon Hill Institute at Suffolk Univerrsity examined proposals by Senate President Birmingham, acting Governor Cellucci and the House Leadership.
Using a state-of-the-art economic model, BHI concluded that the Birmingham proposal, as it affects earned income, scores below the House Leadership proposal on two grounds. It would cost Massachusetts more in revenue while returning less in economic benefits. Both proposals score below the Cellucci proposal in terms of economic benefits, according to the analysis.
The Cellucci proposal would cut the tax on earned income from 5.95% to 5% and on investment income from 12% to 5% over four years beginning in 1998. The House Leadership proposal would cut the tax on earned and investor income to 5.7%, cut the tax on short-term capital gains to 10% and raise taxes on long-term capital gains. It would also increase exemptions for dependents and deductions for children. The Birmingham proposal would permanently double the personal exemption from $2,200 to $4,400 for single filers and from $4,400 to $8,800 for joint filers.
A tax cut makes more economic sense if it means high economic benefits in terms of increased payrolls, new jobs and new capital spending, while imposing only small tax revenue losses on the state, said David G. Tuerck, executive director of the Beacon Hill Institute and chairman of Suffolk University's Economics Department.
BHI's exclusive tax model showed that Cellucci's tax cut on earned income would confer the highest economic benefits an additional $4.1 billion in new payrolls, 96,585 new jobs and $17.3 billion in new spending on capital such as factories, warehouses, retail stores and computers. It would cause the state to lose slightly more than $1 billion in tax revenue in 2001. The House Leadership proposal would generate economic benefits and revenue losses about one-fourth these amounts. See the table.
Cut in Tax on Earned Income: Economic Effects in 2001
Proposal Change in Payroll Change in
Change in Capital Stock Net Tax Revenue Effect Cellucci* $4.1 billion 96,585 $17.3 billion -$1.011 billion House Leadership* $1.0 billion 24,500 $4.4 billion -$320 million Birmingham $634 million 15,066 $2.7 billion -$554 million
*Updated from BHI FaxSheet, March 11, 1998.
Our analysis shows that the Birmingham proposal confers the smallest economic benefits of all three proposals while imposing a greater revenue loss than the House Leadership's, said Dr. Tuerck. This means that only two of the proposals are worth considering the Cellucci proposal that exerts a powerful economic stimulus and the House Leadership proposal that exerts a weaker stimulus but costs less in tax revenue.
For a BHI FaxSheet with further information and methodology, call BHI at 617-573-8750.
Format revised on 7/2/03 2:55 PM
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