BHI
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and Updates on Current Issues
Massachusetts
Personal Income Tax Cut Would Mean More Jobs, Increased Wages
February 1996
Governor
William F. Weld has proposed a reduction in the Massachusetts personal
income tax rate from 5.95 percent to 5.45 percent. The Beacon Hill Institute
econometric tax model shows that the proposal would create 65,600 new
jobs, increase capital spending by about $4.8 billion and increase annual
wages of Massachusetts workers by an amount ranging from $2.2 to $3.2
billion. The state would lose between $328 and $382 million annually
in tax revenue.
The tax
cut is offered as part of a proposal to downsize state government. The
proposal, now before the legislature, consists of eight reorganization
plans and 33 pieces of legislation. It would shed 7,500 jobs, five cabinet
secretariats, 74 agencies and 100 boards and commissions and is predicted
to save $600 million in government expenditures. The proposal phases
in the personal income tax cut over the next calendar year, with the
rate going down to 5.70 percent on January 1, 1997 and reduced to 5.45
percent on January 1, 1998.
Critics
question whether the state can "afford" the tax-revenue loss that would
result from the proposal's adoption, citing an estimate that the tax
cut would cause the state to lose about $500 million in tax revenue.
If the proposed downsizing yielded savings substantially less than the
promised $600 million, Massachusetts would be forced either to run a
deficit or to cut spending on other programs.
In fact,
the tax-revenue loss would be substantially less than feared by critics.
The reason is that $500 million is a "static" estimate made on the assumption
that, under the tax cut, there would be no expansion in employment and
wages and that the tax base would therefore remain frozen at its current
level of about $100 billion.
Contrary
to this pessimistic view, the BHI model shows that the lower tax rate
would cause employment and wages, and thus the tax base, to expand.
When the resulting "dynamic" tax-revenue gain, ranging from $118 million
to $172 million, is taken into account, the actual tax-revenue loss
turns out to be substantially less than $500 million.
The BHI
model shows how the proposed tax cut would reduce the cost to employers
of retaining and attracting workers and thus induce employers to create
new jobs and to engage in new capital spending. A detailed description
of the model is available on request from the Beacon Hill Institute.
Table 1 summarizes its results.
Table
1
Economic Effects of the Weld Tax Cut
| Number
of new jobs |
65,600 |
| Rise
in total wages |
$2.2
to $3.2 billion |
| New
capital spending |
$4.8
billion |
| "Static"
tax-revenue loss |
$500
million |
| "Dynamic"
tax-revenue gain |
$118
to $172 million |
| Actual
tax-revenue loss |
$328
to $382 million |
Revised
on 06/27/2002: HTML
format revised on
11-Jul-2007 2:23 PM