The current economic outlook and spending controls could enable the Commonwealth to accommodate further multi-year tax cuts, if approved by the voters in November 2000, within a balanced budget.”
I couldn’t have said it better myself. But I didn’t need to say it. These are the comments of Moody’s Financial Services, the most venerable of the financial rating agencies. Last December, I visited the three major Wall Street rating agencies to personally tout the strength of the Massachusetts economy and outline the progress we have made in improving the Commonwealth’s fiscal standing, which was on the brink of junk-bond status at the outset of the 1990s.
In January, Moody’s delivered the Commonwealth a bond-rating upgrade, the fourth since 1992. In the announcement, Moody’s praised our well-balanced economy, and acknowledged that we are well prepared for the future.
Opponents of the tax cut will spend the next few months trying to convince the Massachusetts public that it is not affordable. They claim that we will not be able to fund important services because our citizens are able to keep more of their hard-earned money. This is simply untrue. There is absolutely no reason that the Commonwealth cannot address our priorities and reduce the tax rate to return nearly $600 to the typical family of four. In reality, we could have already afforded the rollback last year, had the Legislature come through on its decade-old promise to return the rate to 5 percent. But phased in over three years, the Commonwealth could easily afford the tax cut.
Indeed, the Commonwealth could have absorbed this tax cut in a single year, as demonstrated by the experience of fiscal year 1999. In that year, the Legislature adopted a $600 million tax cut to phase in the doubling of personal exemptions, and later that year, used surplus funds to pay for $527 million in one-time capital projects. Still, the Commonwealth closed out the year with a surplus, certified by the Comptroller last fall, of $348 million. Thus that year’s tax cut and surplus funds totaled nearly $1.5 billion. That means the state could instead have rolled back the personal income tax to 5 percent (at a cost of $1.4 billion) without touching the full commitment to education reform and the record local aid payments contained in that year’s budget.
While I was pleased to add the doubling of personal exemptions to the list of 38 tax cuts under our administration, and originally proposed the use of surplus funds for important one-time capital projects, this exercise shows that the tax cut we now propose could have been accomplished in a single year without threatening budget priorities in any way. But the ballot initiative provides a three-year phase-in of the tax cut, allowing plenty of time for careful planning and prioritizing of expenditures that will allow us to keep the Commonwealth on a strong fiscal course, while maintaining critical services to our citizens.
Furthermore, Massachusetts is now flush in reserve accounts, including $1.4 billion in the “rainy day” or stabilization fund, and $1.8 billion in the unemployment insurance trust fund. According to a study by the Center on Budget and Policy Priorities, in Washington–for which Jim St. George of Tax Equity Alliance for Massachusetts is listed as a local contact–the Commonwealth was one of only eight states that would be able to withstand a national economic downturn without raising taxes or reducing state services. Building up these reserve accounts has been a critical pillar of our economic recovery plan, which has helped to create more than 450,000 new jobs in the past eight years. It also provides us with ample support in case of an unexpected slowing of state revenue growth.
But those who ask if we can afford the tax cut are asking the wrong question. They should be asking whether we could afford not to roll back the income tax to 5 percent.
Reducing the income tax rate is the next phase of the economic strategy that we have followed over the past nine years. We have brought down all of the major barriers that have made life difficult for employers in Massachusetts except for one–we need to lower taxes. Lower taxes are a significant factor in business-location decisions. Tax increases in the past have been associated with job losses and a lower gross state product. As the state with the second highest effective income tax rate in the nation, we cannot ignore that it discourages workers from locating here. Overall, we are the fifth most heavily taxed state. Local, state, and federal taxes consume a larger share of a Massachusetts family’s budget than almost anywhere else in the country. Massachusetts may never be a low-cost state, but why must we continue to be one of the highest? After all, we have to compete with neighborhood rivals like New Hampshire and high-tech competitors like Texas that have no income tax.
If we are to continue to control the Legislature’s appetite for spending and maintain fiscal discipline, we must take some revenue off the table. The notion that government is better suited to handle your money than you are just doesn’t wash. The tax rebate can help families put a down payment on a car, take a vacation, buy a personal computer, or start a child’s college investment. This is tax relief that families could count on each and every year.
But taking the 1989 Legislature at its word, we would expect that lawmakers intended the tax to revert to 5 percent once the fiscal crisis was over. Some would say that the crisis was over as early as 1991, when Governor Weld and I signed the first balanced budget. Others might take the more conservative point of view and say Massachusetts made the fiscal crisis officially a thing of the past in 1997, when the fiscal recovery bonds, issued to pull Massachusetts from its economic morass, were retired. But by any standard, we are three years removed from any remnants of the fiscal crisis and the promise of tax relief is long overdue.
It is important that government keep its promises, so that both the taxpayers and the business community believe what their elected officials tell them. It seems that the time has passed for the Legislature to earn that trust back. If the Legislature won’t join us and cut your taxes, we’ll beat lawmakers at the ballot box in November and do it ourselves.Contrary to public opinion, income tax cuts have not proven to decrease revenue. In fact, the most important factor in maintaining revenue increases is the scale of the economy. Slashing the personal income tax is the best way we can safeguard the economy by facilitating business growth and recirculating $1.4 billion to our commercial markets. In fact, the Beacon Hill Institute at Suffolk University estimates that the Cellucci-Swift tax cut would create 86,000 new jobs and swell Massachusetts’s payrolls by nearly $4 billion.
This November, the voters of Massachusetts will have the unique opportunity to directly weigh in on an issue that affects their daily lives. Those individuals and groups who view state government as their own private feeding trough will oppose the fulfillment of this promise, just as Proposition 2? was vilified in the early 1980s. In the end, it is our belief that the Massachusetts public will endorse the tax cut at the ballot box, and keep Massachusetts on course for economic prosperity well into the new century.
Paul Cellucci is governor of the Commonwealth.