UMass report blames tax cuts for state's fiscal troubles

Economist says reductions cost state $5.5b

By Scott S. Greenberger, Globe Staff, 10/23/2003

Tax cuts, not profligate state spending or the economic doldrums, are to blame for the Commonwealth's current fiscal crisis, according to a new study by an economist at the University of Massachusetts at Amherst.

The report, released as legislators prepare to grapple with what is expected to be a $2 billion budget shortfall in the coming fiscal year, asserts that the state lost about $5.5 billion in revenue by cutting personal income, capital gains, corporate, and sales taxes between 1996 and 2002.

Without the tax cuts, the study says, the state would not have had to slash roughly $3 billion in spending on health, education, and other programs over the past three years. In the current fiscal year, the state also had to resort to fee increases on marriage licenses, house purchases, and license renewals that totaled $500 million, according to one analysis.

The author of the report, Elissa Braunstein of the Political Economy Research Institute at UMass, said yesterday that politicians find it "virtually impossible to resist" cutting taxes when the economy is humming and state coffers are overflowing. But Braunstein said the tax cuts prevented Massachusetts from fully capitalizing on the boom of the late 1990s. Now, she said, it's time to repair the damage.

"Unless the state restores tax rates to previous levels, it will continue to experience serious budget shortfalls and more cuts to essential services," the report states.

Governor Mitt Romney has pledged to veto any broad-based tax increase, saying it would boost unemployment and slow the economic recovery.

Some critics say Braunstein's study gives short shrift to the link between tax cuts and the overall economy: Thanks to the tax cuts, they argue, Massachusetts is now in a better position to compete with other states for businesses and workers.

"Massachusetts already has a reputation for being hostile to business," said David G. Tuerck, an economist at the Beacon Hill Institute of Suffolk University. "If we had failed to cut taxes during that period, we would be bringing in more revenue but the overall condition of our economy would be much weaker now."

Michael J. Widmer of the Massachusetts Taxpayers Foundation, who believes the state should consider raising some taxes, nevertheless cautioned against placing too much of the blame for the state's fiscal woes on the tax cuts. Widmer said the collapse of the stock market, the recession, and the explosive growth of health care costs all contributed to the current crisis.

"It's certainly correct to say that tax cuts have exaggerated the fiscal crisis," Widner said. "It's not correct to say that they alone are responsible."

Braunstein doesn't completely discount the recession, but she argues that its impact on revenue was far less than the tax cuts. Weighing decreases in personal and corporate income as a result of the recession, she estimates that the economic slowdown accounted for only $1.5 billion in lost revenue. As for spending, she says that between 1991 and 2002, state expenditures declined as a percentage of personal income, from 9.7 percent to 9.1 percent.

Braunstein said state spending also stimulates the economy. And Noah Berger, executive director of the Massachusetts Budget and Policy Center, pointed out that businesses and workers choose a home based on the availability of "skilled workers and a decent quality life," not just low taxes.

"When tax cuts lead to cuts in education and higher education, that hurts our economy," Berger said.

At this point, however, there seems to be little appetite on Beacon Hill for a tax increase. Social service advocates hope that as citizens begin to feel the impact of cuts in health care, education, and public safety, there will be an outcry for a tax hike. But so far, legislators say they have yet to feel the pressure from outraged constituents.

Romney, meanwhile, continues to argue that tax increases are exactly the wrong medicine for a state economy struggling to emerge from recession.

"We are not in favor of increasing costs to businesses at a time when we're trying to encourage job growth and expansion in Massachusetts," said Romney spokeswoman Nicole St. Peter. "Raising taxes will kill jobs and make it harder for an economic recovery to take place."

Scott S. Greenberger can be reached at greenberger@globe.com