BHI
FaxSheet: Information
and Updates on Current Issues
The
Massachusetts FY 96 Budget Surplus: Why the Good News Isn’t So
Good and How to Make it Better
July 1996
Because
of a surplus in the state budget, Massachusetts taxpayers stand to pay
$146 to $206 million less in 1996 taxes than expected (provided the
legislature doesn’t spend it first). Good news? Sort of. Under
the method prescribed by law, the money will be returned through a one-time
reduction in taxpayers’ personal income exemption.
This,
however, will do little to stimulate the economy. A different method
would, on the other hand, do much to stimulate the economy. This method,
readily available to the legislature and employed before, would spur
the creation of 19,900 to 27,800 new jobs, bring about $1.4 to $2.1
billion in new capital spending and increase annual wages of Massachusetts
workers by $667 to $932 million per year.
Background
Governor
William F. Weld recently announced a “fiscal dividend” for
Massachusetts taxpayers. Because FY 1996 collections will exceed projections
by $240 to $300 million, taxpayers can look forward to a break on their
1996 taxes. The first $94 million of this surplus will go into the state’s
stabilization fund, leaving $146 to $206 million to be returned to taxpayers.
According to law, a one-time surplus of this kind must be returned through
a temporary increase in the personal exemption. In this instance, the
personal exemption would increase from $4,400 to $5,720 for joint filers.
The governor has urged the legislature to return the money in this fashion
“to its rightful owners” and, in so doing, to resist the temptation
to increase spending.
Two
Ways to Cut Taxes
There
are two ways to cut taxes. One is by changing the tax base (taxable
income). The other is by changing the tax rate. Suppose that the tax
base is $100 billion and that the tax rate is 5 percent, so that the
government collects $5 billion in taxes. Then the government can “refund”
$100 million by either (a) shrinking the tax base by $2 billion or (b)
cutting the tax rate to 4.90 percent. While the two methods may look
identical, they are widely different with respect to their economic
effects.
Temporarily
raising the personal exemption reduces the tax base but leaves largely
unchanged the cost of getting workers to enter the labor force or of
getting workers to expand their hours. A permanent reduction in the
tax rate, on the other hand, reduces the cost of labor and thus significantly
expands employer demand for labor.
A Job-Creating
Tax Cut
A
one-time refund to Massachusetts taxpayers, however well intended, will
therefore do little to encourage job creation and stimulate state economic
activity. In place of a one-time personal exemption increase, the Beacon
Hill Institute suggests returning the money through a permanent reduction
in the income-tax rate. Such a reduction would create jobs and increase
wages and capital spending in Massachusetts.
Current
taxable personal income in Massachusetts is $100.148 billion. Taxed
at the current rate of 5.95 percent, personal income tax revenue would
be $5.959 billion in 1996. Lowering the personal income tax rate to
between 5.74 and 5.80 percent would enable the state to return the $146
to $206 million in surplus revenue to taxpayers.
Returning
this revenue by reducing the personal income tax rate would generate
the increased jobs, wages and capital spending summarized in Table 1.
It would even produce a fiscal dividend for the state, insofar as the
expansion in jobs and wages would increase the tax base, bringing in
new revenues to offset partially the initial “refund.” This
“dynamic” tax-revenue gain, ranging from $39 to $54 million,
would cause the net revenue loss to be between $107 and $152 million.
Table
1
Economic
Effects of a Reduction in the Personal Income Tax Rate
| Number
of new jobs |
19,900
to 27,800
|
| Rise
in annual wages |
$667
to $932 million
|
| New
capital spending |
$1.4
to $2.1 billion
|
| Tax
refund(“Static”revenue loss) |
$146
to $206 million
|
| “Dynamic”tax-revenue
gain |
$39
to $54 million
|
| Net
tax-revenue loss |
$107
to $152 million
|
In practical
terms, the state government would never miss the $152 million that,
at most, it would lose by instituting a permanent rate reduction. Tax
revenues have grown at an average annual rate of almost 5 percent over
the last four years. A net revenue loss of $152 million would be less
than 1 percent of state spending.
George
Will has said, "The only news is economic news, and the economic
news is always bad." And so it is with this supposed windfall to
Massachusetts taxpayers. The budget surplus and the tax cut it makes
possible are signs that the tax rate has been too high. Good economic
news will come when the legislature lowers the tax rate permanently
and by enough to prevent future surpluses.
Kathleen
M. Lang, PhD, BHI research associate, contributed to this BHI FaxSheet.
Persons having further questions should contact Ellen F. Foley, BHI
director of communications at (617)573-8750.
Related Links:
Weld,
Cellucci call for $234 million income tax cut 9/13/96
BHI
Fax Sheet: MA Personal Income Tax Cut Would Mean More Jobs, Increased
Wages
Revised
formatting on
11-Jul-2007 12:53 PM