Governor Cellucci tax cut: Right on the money

David G. Tuerck

Once again, Massachusetts is at a fork in the road.  Sometime over the next several days, the state legislature will make a fundamental choice concerning the fiscal and economic future of the Commonwealth.  That future will depend on whether the legislature adopts a tax proposal offered by Governor Paul Cellucci or adopts instead some compromise version of tax proposals offered by the House and Senate leadership.

The Governor wants to reduce the state income tax rate from 5.95% to 5% over the three-year period ending in fiscal year 2002.  We have heard a good deal so far about whether the state can "afford" these tax cuts.  But that misses the real story.  When fully implemented, the Governor’s plan would save state taxpayers about $1.3 billion annually in taxes. That means about $430 per year in each taxpayer’s pocket. 

Also ignored are the benefits to the state's economy.  In addition to the immediate savings to taxpayers, a tax cut of that magnitude would confer substantial, measurable benefits on the state.  The Beacon Hill Institute estimates that the tax cut would create about 86,000 new jobs, expand payrolls by about $3.9 billion and add about $710 million worth of factories, machines, computers, office space and other equipment and structures that make up the state’s stock of physical capital.

This is basic economics at work here.  Lowering taxes reduces the cost of labor to Massachusetts firms.  This enables businesses in Massachusetts to compete more effectively. 

What would a tax cut of this size "cost" in terms of state tax revenues?  When the economic benefits are accounted for, Massachusetts would lose just over a billion dollars in revenue, which amounts to about 5% of the state budget. 

For the last several years, the rapid growth of the state economy has created surpluses that have run between $600 million and a billion dollars.  This year's surplus could be as high as $500 million.  And that's despite major tax cuts enacted last year.

If the economy continues to grow as it has for the past several years (which the Governor's tax cut would help it do), then the state could pay for about half the tax cut out of the surplus and about half by cutting spending.

The leading alternatives to the Governor's proposal are anemic in comparison.  The House would cut the income tax rate only to 5.75%.  The Senate wouldn't cut the tax rate at all.  Instead, it would expand childcare tax deductions, offer tax credits to seniors, double the exemption available under the earned income tax credit and double the deductibility of rental expenses.  Both the House and the Senate would rescind a capital gains tax cut promised in earlier legislation. 

As for economic benefits, the House proposal would confer only a small fraction of those offered by the Governor's proposal.  The Senate's proposal offers absolutely no stimulus to the economy.

Moreover, rescinding the capital gains tax cut would exert a substantial negative effect on the economy, causing businesses to cut their capital spending by about $921 million and local governments to lose about $9 million in property tax revenues.  Most significantly, it would be viewed as a double cross to investors who made decisions to hold assets for six years on the expectation that the rate would be cut to zero as promised.

So why would any taxpayer support the House or Senate proposal over the Governor's?  Some observers worry that a downturn in the economy would turn the surplus into a deficit and thus make the tax cut even less affordable. 

But the state is sitting on a billion dollar rainy day fund that exists to meet just such an emergency.  And, anyway, why would we want to keep taxes high in an economic downturn?  A billion dollar tax cut might be exactly the right medicine should the economy weaken.

Another argument stems from the state's supposed infrastructure crisis.  Billions of dollars in state capital projects go unfunded, it is said, because of the Big Dig and because of a self-imposed limit on state borrowing.

But it is unreasonable to expect taxpayers to carry this burden alone.  There are other places to look to save money, among them public transit and education, both of which are oversubsidized.

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 term of how it affects the overall economy.  By cutting the income tax rate and by implementing the already promised cut in capital gains taxes, the Governor's proposal confers the broadest and most substantial benefits on the economy.

 In view of the magnitude of those benefits, the question is whether we can afford not to take the proven path of lower taxes and increased economic growth.

David G. Tuerck, PhD, is chairman and professor of Economics at Suffolk University where he also serves as Executive Director of the Beacon Hill Institute for Public Policy Research.

This article appeared in the June 23, 1999 edition of the Boston Herald.

Format revised on 18 August, 2004