BHI
FaxSheet: Information and Updates on Current Issues
The
Weld-Cellucci tax plan: An antidote for federal tax hikes
August
1993
A tax-cut proposal now before the Massachusetts legislature would
add more than $670 million in new production and almost 21,000
new jobs to the Massachusetts economy. Yet, the proposal might
not be adopted unless the state legislature, already nervous about
a possible FY-94 deficit, finds a way to cut the state budget.
Without knowing what to cut and why, the legislature might find
the state's economy too weak and the national policy climate too
uncertain to pass a tax cut aimed at making the state's economy
stronger. However, the Beacon Hill Institute has found that the
state can cut expenditures by enough to finance the loss in revenues
and, at the same time, generate significant, identifiable economic
benefits.
On
August 11, Governor William Weld condemned the Clinton tax increases
as threatening the state's economic recovery. "The new job-killing
taxes from Washington are seizing close to $1 billion a year from
the fragile Massachusetts economy, just as we are starting to recover
from the recession," said the governor. As an antidote, he and Lt.
Governor Paul Cellucci proposed cuts in income and gasoline excise
taxes that would free "more than $200 million for the private sector
to invest in the growth of our economy." Specifically, they proposed
to:
-
cut the state excise tax on gasoline by 4.3 cents per gallon;
-
cut the state tax on earned income from 5.95% to 5.85%;
-
increase
the exemption for filers age 65 and over on Massachusetts bank
interest (from $200 to $2,400 for married filers and from $100
to $1,200 for single filers);
-
raise
the no-tax-status threshold (from $12,000 to $13,500 for married
filers and from $8,000 to $9,000 for single filers).
Under
the Weld-Cellucci proposal, the gasoline-tax reduction would take
effect on October 1, 1993 and the income tax provisions on January
1, 1994. For FY 94, the administration estimates a "static" revenue
loss (revenue loss calculated without consideration of the stimulative
effects of the tax cut on economic activity) of $124 million. The
tax would be only partially in effect in FY 94. The "fully annualized"
static revenue loss is $207 million.
Economic
Effects
Using its dynamic econometric tax-analysis model of the Massachusetts
economy, the Beacon Hill Institute has estimated the economic effects
of the proposal. Table 1 indicates that, when fully implemented, the
tax cut would cause Massachusetts production to rise by an estimated
$678 million and would, in the process, lead to the creation of an
estimated 20,827 new jobs. The tax cut would stimulate an initial
rise of $1,596 million in net nonresidential investment and would
stimulate a permanent rise of $33 million in net nonresidential investment
and of $175 million in gross nonresidential investment.
Table
1
Economic Effects of the Weld-Cellucci Tax Cut
|
Implementation
of
Tax Cut
|
Rise
in Production
|
New
Jobs
|
Initial
Rise in Net Investment
|
Permanent
Rise in Net Investment
|
Permanent
Rise in Gross Investment
|
| Partial
(FY94 only) |
$397
million |
11,858 |
$934
million |
$19
million |
$102
million |
| Full
(fully annualized) |
$678
million |
20,827 |
$1,596
million |
$33
million |
$175
million |
Deficit
Dangers
Critics of the proposal are correct in pointing out that the FY-94
budget is already in danger of running a deficit. The budget approved
by the governor and by the legislature assumes that the state
will receive tax revenues in the amount of $10,540 million. BHI
currently estimates that FY-94 revenues will reach only $10,345
million. (See Table 2.) Given nontax revenues of $5,175 million
and expected total expenditures of $15,578 (including only those
increases in supplemental spending needed to cover existing, unfunded
mandates and collective bargaining obligations), the state faces
a FY-94 deficit of $58 million. Allowing for a "dynamic" revenue
gain of $15 million attributable to the stimulative effects of
the tax-cut proposal, the state would have to cut expenditures
by $167 million in FY 94 in order to adopt the proposal and balance
the already-unbalanced budget.
Table
2
Budget Implications of the Weld Tax Cut
($ millions)
| REVENUES |
|
| BHI
Tax-Revenue Forecast |
10,345 |
| Nontax
Revenue |
5,175 |
| Total
Revenues |
15,520 |
| Expenditures |
|
| Budgeted
Expenditures as of August 24,1993 |
15,523 |
| Unfunded
Mandates and Collective Bargaining Obligations |
55 |
| Total
Expenditures |
15,578 |
| Budget
Deficit before Tax Cut |
58 |
| Static
Revenue Loss from Tax Cut |
124 |
| Budget
Deficit after Tax Cut (static estimate) |
182 |
| Dynamic
Revenue Gain from Tax Cut |
15 |
| Required
spending Cut |
167 |
"Financing"
the Deficit
Fortunately, however, it is possible for the state to finance the
expected deficit. This is because of the relatively small size of
the spending reduction that is required and because of the considerable
amount of room for cutting that the state budget still offers. Table
3 identifies 9 items totaling $167 million that could be cut without
an overly painful reduction in state services. Items 1-7 are cuts
(or are based on cuts) that were proposed by the administration
for the purpose of funding the 1993 Education Reform Act but that
were never implemented. Items 8-9 are cuts that could, in BHI's
judgment, be made without serious negative effects on services.
The SHARP program (item 8) does not, in our view, make a significant
contribution to the supply of low-income housing. The state spends
more than $700 million on higher education and on the administration
of constitutional offices and secretariats. Consolidation of educational
services and of state offices would make the cut suggested here
(item 9) relatively easy to absorb.
The
spending cuts suggested in Table 3 would be sufficient to finance
the "partial" tax cut slated for FY 94. Full implementation of
the proposal would increase the static revenue shortfall by $83
million (from $124 million to $207 million). Of this amount, $7
million could be recouped through "dynamic" revenue gains and
the remainder through normal, expected FY-95 revenue growth. Indeed,
FY-95 revenues will be high enough to finance an even larger tax
cut.
Table
3
Suggested Budget Cuts
($ millions)
| 1 |
Reduce
State Assistance to MBTA. Require retirees to contribute
10% to their health insurance, and limit tort liability
to $100,000. |
13 |
| 2 |
Adopt
"Fair Labor Standards Act of 1935." Reduce state
overtime charges by adopting the Act's overtime standards. |
6 |
| 3 |
Create
a Brokered Transportation Program. Centralize and
coordinate transportation across agencies on a regional
basis. |
8 |
| 4 |
Amend
Medical Leave of Absence Policy. Reduce from seven
to four days the period of time for which nursing homes
are reimbursed for patients who have been transferred
to an acute hospital. |
3 |
| 5 |
Adjust
Reimbursement of Private Chronic Care Hospitals. Reduce
reimbursement to reflect level of care actually provided. |
10 |
| 6 |
Rescind
Seven-Percent State Employee Pay Raise Effective September
1, 1994. |
78 |
| 7 |
Change
Standards for Chapter 766 (Special Education) Required
Services. By changing the Massachusetts standard of
"maximum feasible benefit" to the national norm of "free
and appropriate services," the state will reduce the amount
of state aid that is needed for cities and towns to meet
their special-education requirements |
20 |
| 8 |
Abolish
the SHARP Program. Conduct initial phase-out by eliminating
housing subsidies to developers. |
9 |
| 9 |
Cut
Higher Education Budget and State Administrative Budgets.
Consolidate programs as needed to achieve cost saving.
|
20 |
| |
Total
Suggested Budget Cuts |
167 |
Many observers consider the Weld/Cellucci proposal to be a political
ploy, not worth taking seriously. This analysis suggests, instead,
that the administration has offered an effective and easy-to-swallow
antidote to federal tax hikes.
|