Most taxpayers would agree that it is desirable to reduce the Massachusetts income tax rate to 5 percent, especially given a state income tax burden that is one of the highest in the nation. The Massachusetts Taxpayers Foundation shares this view.

The real question is how we can achieve that result while preserving the extraordinary financial progress of the 1990s and making the investments in education and capital needs that will sustain our economy in the years ahead. While tax cuts can improve the Commonwealth’s competitive position over time, it is equally important for a state like Massachusetts–whose fortunes rise or fall on its high-tech, knowledge-driven economy–to have the well-educated, highly skilled work force and the modern infrastructure needed to support such an economy.

That is why the Massachusetts Taxpayers Foundation has presented an alternative tax cut proposal that would phase in the tax cut to 5 percent at a pace that would be tied to the rate of growth in the economy–specifically, to the growth in state personal income adjusted for inflation. Under this proposal, if the economy continues to grow strongly, the rate would reach 5 percent only a year or so beyond the governor’s timetable; if the economy slows, the pace of tax cuts would slow as well. This approach would protect our hard-won fiscal gains in the event of an economic downturn, and also make it possible to continue key investments while proceeding on a steady track to return the tax rate to 5 percent.

The risk of making the wrong choice on tax cuts is great. In addition to the governor’s $1.2 billion proposal, there are two other questions headed for the November ballot that would cut taxes by an additional $850 million. The initiative petition to adopt a state charitable deduction, with a manageable $200 million annual revenue impact, would encourage people to give to schools, churches, cultural institutions, and other worthy causes. It would also bring Massachusetts into line with the federal government and most other states. However, another ballot measure to provide a dollar-for-dollar income tax credit for tolls and auto-excise taxes would reduce state revenues by some $650 million at a time when the Commonwealth needs to put more, not less, into financing critical capital needs. This question would result in taxpayers taking on the entire cost of building and operating the state’s transportation system–and asking nothing of tollpayers.

The tax cuts of the last two years–in combination with previously approved cuts–have already reduced revenues by almost $1.2 billion, with over $500 million of reductions still to be phased in over the next three years. While the state economy has enjoyed a remarkable period of growth, no one can forecast how long the expansion will last. In fact, there is substantial evidence that the recent strong growth in state revenues owes much to stock market euphoria that could end abruptly. Although incomes in the state remain robust, job growth has already slowed, and the combination of low population growth and a shortage of skilled labor will limit future job creation.

Looking forward, one of the state’s greatest challenges will be to sustain the investments–in people and infrastructure–that are most critical to our long-term economic health. In the last decade, the state has expanded its annual funding of local schools from $1.3 billion in 1993 to $2.8 billion today, in order to provide the financial foundation for greater student achievement. At least $100 million of additional funding will be required each year to maintain the reform program, and there are many demands to increase spending much more.

We must also find a way to finance a daunting list of major capital projects that are equally critical to the state’s economic future. With the nation’s third-highest debt burden, a 40-percent cut in federal highway aid, and the staggering financial weight of the Central Artery project–which has become even more burdensome with recent cost overruns–Massachusetts is struggling to fund highways, transit lines, school buildings, water projects, environmental cleanups, and many other pressing infrastructure needs. Capital requirements now total at least $10 billion–10 times the $1 billion cap on annual bond spending designed to hold down the growth in the state’s debt. Uncertainty about the final cost of the Artery is adding to the pressure on capital finances. With the Commonwealth’s traditional bond-funded capital program near its limits, the resources to meet these needs will increasingly have to come from the state’s tax-funded operating budget.

Other major cost increases will be largely unavoidable in the years ahead. Medical care for the poor and employee health benefits, which consume almost one-quarter of the state budget, are facing massive cost pressures that will only get worse with escalating HMO rates and the enormous financial stress on hospitals, nursing homes, and other health care providers. At the same time, state pension costs are jumping sharply in the wake of a higher estimate of the unfunded pension liability. Although the recently enacted MBTA reforms promise future fiscal relief, state assistance to the T is rising by about $90 million in 2001 to accommodate the phase-in of the reforms.

We must not undermine the phenomenal record of fiscal success of the past decade. A measured approach to cutting the income tax rate–linked to growth in the economy–will safeguard the state’s ability to invest in our economic future while fulfilling other important obligations.

Michael Widmer is president of the Massachusetts Taxpayers Foundation.

A tax cut we don’t need–and can’t afford

By James St. George
Spring 2000

Gov. Cellucci says Massachusetts needs his tax cut in order to be “competitive.” He could not be more wrong. The massive tax cuts he has put on the November ballot would require Massachusetts to make large cuts in education, local aid, health care, public safety, road and bridge repair, and other important investments. When all is said and done, it is really just that simple. Those who think we should reduce our support for schools and health care, who think we should become more dependent on the property tax to pay for local services, will support the governor’s tax cut. The rest of us, those who think such cuts would be ill advised–if not crazy–will vote “No.”

According to the governor, we can have it all, big tax cuts and more spending. Of course, that’s the kind of supply-side nonsense that put the federal government $5 trillion in debt. Still, he loves to quote Moody’s, the bond-rating firm that said Massachusetts could balance the budget while enacting his tax cut. But that’s just simple arithmetic. Sure we could cut taxes and balance the budget, as long as we cut spending deeply enough.

And don’t just take my word for it–go to the Moody’s report that the governor cites and see for yourself. Cellucci cuts off the quote just before this “most venerable of the financial rating agencies,” as he describes the company, says that, to balance the budget and enact his tax cut, “corresponding spending adjustments” would be needed. In plain English, that means cutting the investments that make Massachusetts a great place to work, live, and raise a family.

For that matter, we can look at the governor’s own budget proposal for the coming fiscal year to see how big tax cuts would affect these investments. While accounting for only about one-sixth of the final price tag of his tax cut, and not a penny for the other two tax cuts that will also be on the ballot, his budget has a razor-thin surplus of 0.1 percent of total spending. There is no more room for new tax cuts. And to show any positive balance at all, he has to cut local aid, cut funding for AIDS education and services, cut support for local roads and bridges, and barely stay even on education, proposing the smallest increase in nearly a decade. How will he pay for the other five-sixths of his tax cut, to say nothing of the other $900 million of tax cuts on the ballot?

Thus the issue before Massachusetts voters comes into clear view. Should we put the state on automatic pilot and guarantee years of new tax cuts, no matter what happens to the economy or the state budget, at the expense of important investments? I don’t think so, and neither does a majority of Massachusetts voters. In a recent independent poll (distributed widely by Republicans to show the governor’s high approval ratings), voters asked to choose between tax cuts and investments in education, health care, and roads and bridges rejected tax cuts by a three-to-one margin.

It is helpful to put Cellucci’s proposal in some context. During the 1990s, Massachusetts has passed more than 30 tax cuts, with a value of $2.4 billion. Some of those tax cuts were aimed at middle-income taxpayers, particularly doubling the personal exemption (which saved every couple in the Commonwealth $262 a year), increases in deductions for child care and dependents, and a modest income-tax rate cut. Other tax cuts were aimed at low-income people, investors, and profitable businesses. Say what you will about the political leaders on Beacon Hill, one cannot plausibly claim that they have been averse to cutting taxes.

Now Cellucci and others want to go much, much further. In addition to the $1.2 billion in tax cuts Cellucci is offering, there will be two other tax cuts on the November ballot, with a cost of nearly $900 million a year. On top of that, there are $450 million in tax cuts that have already been passed but not yet phased in. Thus, should the tax cuts on the November ballot be enacted, Massachusetts would be facing some $2.5 billion in annual tax cuts in just a couple of years, 15 percent of state tax revenue.

For what purpose? The claim that we need the tax cuts to stimulate the economy would be laughable if it weren’t so dangerous. When Cellucci told The Boston Globe in February that the $1.4 billion cost overrun on the Big Dig proves how much we need the tax cut–because it will generate growth and therefore new revenue–we could only scratch our heads. Is he serious? Does he really think that cutting taxes would give us more money to pay for the Big Dig? Massachusetts already has the third highest debt in the nation. Just how high does he want to go?

The calls for ever-larger tax cuts are not because Massachusetts is still a high-tax state. US Census Bureau data show that we rank 27th in state and local taxes as a share of personal income, 40th when you take into account all state and local revenue (including non-tax revenue sources like fees and other charges). Even the Tax Foundation, a conservative Washington group that each year highlights “Tax Freedom Day,” ranks Massachusetts 37th in the nation in terms of total tax burden.

And Cellucci’s tax cut proposal certainly isn’t about giving working families a big tax cut. As too often happens, the biggest slice of his proposal goes to the wealthiest people in Massachusetts, who are benefiting the most from the booming economy. A family right in the middle of the income distribution in Massachusetts, with an income of $55,800, would save just $21 a month, or $250 a year from his proposal. But an executive earning a salary of $500,000 would save nearly $3,600; he or she would save more in one month than an average family would save in an entire year. And low-income parents who work hard and struggle to raise their children in dignity–whose incomes have fallen the most over the last decade–would get next to nothing from his proposal.

Working families would see only a small savings from the Cellucci proposal, but they would pay a big price. Education cuts would be all but inevitable. Why? Because that’s where the money is. Education is the single largest component of state spending, and when the state has to cut, schools are quickly on the chopping block. Ten years ago, when the state last faced significant spending cuts, education spending was cut by 39 percent in just four years, after adjusting for inflation. To make those cuts during a deep recession is painful. To contemplate such cuts in a time of prosperity to pay for a tax cut is inexcusable.

Meet the Author
But that’s not the only way Massachusetts families would pay for the proposed income tax cuts. Cutting the income tax inexorably leads to increases in the property tax. When state revenue began falling in the late 1980s, local aid was cut deeply. As a result, average property taxes soared by nearly 12 percent between 1989 and 1991. In the eight years since then, with local aid rising at a moderate rate, average property taxes have risen only 8.7 percent.

Paul Cellucci is taking Massachusetts down a dangerous path of tax cuts, spending cuts, increased debt, and fiscal chaos. Liberals and conservatives alike recognize that our tax burden is already more than competitive. For Massachusetts to compete effectively in this new century, we have to have the best-educated students, a healthy work force, an efficient transportation network, and a great quality of life. His tax cut would take us in just the wrong direction.

James St. George is executive director of the Tax Equity Alliance for Massachusetts and the TEAM Education Fund.