Massachusetts Should Cut Income Tax to 5 Percent

Published July 1, 2004

A June 10 economic analysis by the Beacon Hill Institute (BHI) at Suffolk University finds the Commonwealth could create thousands of new jobs and millions of dollars in new investment if, as Governor Mitt Romney (R) proposes, the legislature would cut the income tax from 5.3 percent to 5 percent. The state could increase spending in FY 2005 by 7.57 percent over FY 2004 even as it absorbed the loss in tax revenue that the tax cut would bring about.

BHI bases its findings on its State Tax Analysis Modeling Program (STAMP). In December 2003, BHI predicted FY 2004 tax revenues would be $15.532 billion, relying in part on STAMP to make its forecast. A report from the state shows the actual amount will be $15.746 billion, meaning BHI’s December forecast will be within 1.4 percent of the actual amount and more accurate than any other recognized forecast made at that time.

Using STAMP, BHI finds that, by cutting the income tax to 5 percent effective January 1, 2005, the state would experience an immediate rise in employment of 3,683 jobs and a rise in investment of $7.3 million. Real (inflation-adjusted) disposable income would rise by $243 million. By 2008, the state would have 7,885 new jobs, $17.1 million in additional investment, and $469 million in additional disposable income.

The proposed tax cut would cause FY 2005 tax revenues to be $237.1 million less than they would have been without the tax cut. In subsequent years, the annual shortfall would be about $500 million. However, that loss in tax revenue would be offset by a surge in tax revenues brought about by an improving economy. FY 2004 tax revenues will exceed FY 2003 tax revenues by about $775 million, or 5 percent. And even with the tax cut, FY 2005 tax revenues would exceed FY 2004 revenues by $307 million, or 2 percent.

This would make it possible for taxpayers to enjoy the benefits of the tax cut while allowing the state to increase spending. Using its updated revenue forecast, BHI finds the state could increase spending in FY 2005 by 7.57 percent even as it cut the income tax rate to 5 percent, as proposed by the governor.

In 2000, Massachusetts voters approved, by a large margin, a ballot measure cutting the income tax rate to 5 percent over a period of three years. In 2002, the state temporarily froze the rate at 5.3 percent owing to a sharp fall in tax revenues.

In commenting on BHI’s findings, David G. Tuerck, executive director of the Institute, said, “the state is now in a position to honor the will of the voters, as expressed four years ago.” Said Tuerck, “By cutting the tax rate, the state can simultaneously strengthen the state economy and grow state government at a respectable pace.”

Frank Conte is director of communications for the Beacon Hill Institute. His email address is [email protected].