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"Massachusetts
has some of the best entrepreneurs, scientists and managers
in the country. If we pass the grad tax, we will make it easier
for other states, especially those that are in the process
of cutting their taxes, to lure away this talent."
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David
G. Tuerck
November 1994
Massachusetts
has come a long way since the tax-and-spend days of the Dukakis
administration. Gov. William Weld, up for re-election this
year, proudly reports his success in balancing the state budget,
privatizing government services and cutting estate and business
taxes.
Two
questions on the November ballot show, however, that the crowd
that gave us the label "Taxachusetts" is still a
force to be reckoned with. Question 6 would amend the constitution
to scrap the existing "flat" tax and put it in its
place a graduated or progressive income tax. Question 7 would
implement Question 6 by imposing a new graduated rate structure,
rising, for married filers, from 5.5 percent on the first
$81,000 of income to 9.8 percent on income above $150,000.
The
idea of imposing a graduated income tax may seem unremarkable.
It turns out, however, that the Massachusetts income tax is
already highly progressive (in part because of a generous
no-tax threshold). Questions 6 and 7 would simply make the
existing tax, already the highest flat tax in the country,
even more progressive, giving the state the eighth-highest
top tax rate in the country and the third-highest bottom rate.
With Mr. Weld's re-election almost assured, the grad tax is,
after the race for Ted Kennedy's Senate seat, this year's
hottest ballot issue.
The
campaign for the grad tax is led by a public-employee advocacy
group that poses as a champion of the middle class. The campaign
against is led by a coalition of businesses inclined to see
Question 6 and 7 as putting the legislative fox in charge
of the tax-code chicken coop.
Former Senator Paul Tsongas decries the grad-tax battle as
an unnecessary and embarrassing "tong war" that
has dashed any hope for genuine and badly-needed tax reform.
Some blame proponents for this state of affairs. Others blame
the "selfish" wealthy, who would deny everyone else
a tax break. But a more realistic assessment puts the blame
elsewhere - on the state's declining competitiveness, combined
with and ostrich-like refusal on the part its intellectual
elite to see high taxes as a cause of its problems.
A
well-known local columnist recently wrote an article entitled,
"State of Decline: Is Massachusetts sliding into mediocrity?"
Observing that Massachusetts has lost two-thirds of its large
manufacturers since 1988 and suffered an 11.3 percent decrease
in employment over the 1989-92 contraction, this writer concludes
that the blame lies with "whiny" businessmen and
"nonresponsive" government. The solution? More spending
for the environment and for "diversity." There is
no mention of the 19 percent increase in the state tax on
earned income that has taken place since 1989.
As for the grad tax, a "tong war" it is. Proponents
run commercials demonizing CEOs who voice their opposition.
Arguments that the grad tax would hurt business or the economy
are branded "lies." A conservative state legislator
has compared the tax to bolshevism.
"Opportunism"
would be a better word. It is voter innocence, not ideology,
that grad-tax proponents are exploiting. They claim that the
grad tax wouldn't effect business (even though anyone with
a state tax return can see that unincorporated businesses
would be subject to the new rate structure). Then they claim
that most businesses would pay lower taxes under the grad
tax (even though most business income is reported by taxpayers
subject to the higher rates imposed by the grad tax).
Proponents
freely claim that the grad tax would cut taxes in 1995 for
92 percent of the public, even though the correct number is
easily computed to be about 78 percent and even though rising
living standards would cause this number to decline rapidly
in the future years. They also ignore the Draconian marriage
penalty that the grad tax would impose.
Probably
the biggest embarrassment to the state in all this is the
proponents' repeated mention of a report by Mr. Weld's "own
Department of Revenue" supposedly showing the grad tax
to be "revenue neutral." What the report shows,
however, is its authors' confessing that their "Dynamic
Analysis Model... was not designed to forecast the dynamic
economic impacts" of the grad tax. To estimate revenue
effects, the authors had to fall back on a static analysis,
which assumes that the state could tax income at 100 percent
without inducing taxpayers to change their economic behavior
by one iota. Unsurprisingly, the report shows the grad tax
as exerting only a small effect on revenues.
The
report's authors make it clear that they have to leave "unresolved"
the question of the grad tax's behavioral effects. Disregarding
this fine print, grad tax proponents trumpet the report as
promising a free lunch: lower taxes for almost everyone, and
not one penny less in tax revenues or government "services."
Mr. Weld, a self-styled "filthy supply-sider," has
been understandably quiet.
When
behavioral effects are revealed, the free lunch disappears.
The grad tax would raise the average marginal tax rate on
earned income by 17 percent. The ensuing increase in labor
costs and decrease in employer demand would cause the state
to lose about 78,000 jobs, $87.5 million in tax revenue and
$1.2 billion in wages in 1995 alone. Some jobs would disappear
because of the increased cost of retaining high-wage workers
in demand by other states.
Massachusetts
has some of the best entrepreneurs, scientists and managers
in the country. If we pass the grad tax, we will make it easier
for other states, especially those that are in the process
of cutting their taxes, to lure away this talent. That way,
people outside of Massachusetts who don't much like our politics
should find it easy to love our taxes.
David
G. Tuerck is executive director of the Beacon Hill Institute
and chairman and professor of economics at Suffolk University.
This article first appeared in The WashingtonTimes
on November 4, 1994.
Format
revised on June 30, 2005 2:48 PM
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