BHI
FaxSheet:
Information and Updates on Current Issues
Corporate
Tax Proposal Would Mean More Jobs, Higher Wages for Massachusetts
Workers
October 3, 1995
A
proposed reduction in corporate taxes would, if applied to all Massachusetts
corporations, create between 6,732 and 10,405 new jobs in Massachusetts
and between $382 and $615 million in additional wages for Massachusetts
workers. If applied only to manufacturing corporations, the same
proposal would destroy between 2,350 and 3,446 jobs and reduce wages
by between $144 and $222 million.
The
"Act To Promote Job Growth in the Commonwealth," now before
the state legislature, would change the corporate-tax apportionment
formula to apply only to sales in Massachusetts, thus effectively
lowering the tax rate on corporations with mainly out-of-state sales
and in-state payroll and property. Currently, Massachusetts taxes
corporations according to their payroll, property, and sales in
Massachusetts. Some political leaders have suggested that they might
support the proposal only if it is limited to the manufacturing
corporations.
Using
an econometric model developed for the purpose of analyzing proposed
changes in state law tax, the Beacon Hill Institute has examined
the "single-sales-factor" proposal, both as it would apply
to all corporations and as it would apply only to manufacturing
corporations. The results of its analysis are summarized in Table
1.
Table
1
| Labor
Market Effects |
Revenue
Effects |
|
| |
Change
in Employment |
Change
in Payroll |
Static
Revenue Effect |
Dynamic
Revenue Effect |
Net
Revenue Effect |
| All
Sectors |
6,372
to 10,405 additional jobs |
$382
to $615 million in new wages |
$227
million revenue loss |
$23.3
to $37.7 million revenue gain |
$189.3
to $203.7 million revenue loss |
| Manufacturing
only |
2,350
to 3,446 fewer jobs |
$144
to $222 million in lost wages |
$162
million revenue loss |
$9.0
to $13.9 million revenue loss |
$171.0
to $175.9 million revenue loss |
In
addition to the effects on the jobs and wages, Table 1 shows the
effects of the proposed tax cut on Massachusetts tax revenues. If
applied to all sectors, the tax cut would produce a 1995 revenue
loss of about $200 million. This revenue loss is the net result
of two effects: (1) the "static" revenue loss - the loss
computed on the assumption of no change in wages or capital spending
and (2) the "dynamic" revenue gain - the revenue gained
as a result of the increased wages and capital spending that the
tax cut would bring about. If applied to the manufacturing only,
the tax cut would produce a net loss of about $175 million in tax
revenue.
The
BHI model shows how changes in tax law affect the costs of labor
and of capital to Massachusetts employers. It shows, at a high level
of statistical confidence, that (1) by reducing the cost of labor,
cuts in state income and payroll taxes encourage employers to create
new jobs and (2) by reducing the cost of capital, cuts in state
corporate taxes encourage them to engage in new capital spending.
A
tax cut of the kind under consideration here exerts offsetting effects
on the labor market. By encouraging corporations to locate Massachusetts
or to expand-in-state production, it encourages them to create jobs
and raise wages in Massachusetts. Conversely, by reducing the cost
of capital relative to that of labor, it encourages "downsizing"
and wage cuts.
That
data show that, for a corporate tax cut applied to all Massachusetts
sectors, the first effect will dominate, leading corporations, on
balance, to create jobs and increase wages. For the same cut applied
only to manufacturing, however, the second effect will dominate,
leading the corporations to destroy jobs and reduce wages. This
is consistent with the strand of economic theory that suggests that,
while broadly based tax cuts lead to economic efficiency, narrowly
based tax cuts are likely to have the opposite effect.
The
data argue for broadly based tax cuts as a way of creating jobs
in Massachusetts. They argue persuasively against offering tax cuts
selectively as a way of keeping certain firms from leaving the state.
Such tax cuts might have the opposite of the intended effect.
This
BHI FaxSheet was prepared by David G. Tuerck, Ph.D., executive Director,
with the assistance of In-Mee Baek, Ph.D., resident scholar and
tax model project director, and of Kathleen M. Lang, Ph.D., research
Associate. A detailed description of regression results and simulation
methods is available from the institute on request. Contact Ellen
F. Foley, director of communications, at 617-573-8750.
Please
send any questions or comments about this web page to fconte@beaconhill.org.
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on April 6, 2000; HTML revised on April 13, 2005 2:41 PM