August 28, 2002

Question 1  Eliminate the State Income Tax?

The Real Facts

The Libertarian Party in Massachusetts is promoting a ballot initiative to abolish the state income tax, which would wipe out well over $10 billion used to fund public services. If successful, the initiative would cost seven to eight times as much as Question 4 in 2000, the largest tax cut in state history and a significant contribution to the current fiscal crisis in Massachusetts. The Libertarians try to portray the tax cut as a modest proposal, but make no mistake: if successful, the initiative would eliminate more than half the state’s tax revenue, forcing deep cuts or even elimination of programs such as education, health care, and public safety.

In pushing their proposal, they suggest ominously that “facts [have] been kept from you.” Actually, there is a more benign explanation than some sinister force keeping the truth from voters; the facts they put forward are simply untrue. At some level, however, a focus on facts and misrepresentations sidesteps the fundamental issue before voters this fall: this is an utterly unrealistic and irresponsible proposal that would devastate the very public services  such as schools, hospitals, nursing homes, public safety, and transportation systems  that every state in the nation relies on to build a sustainable economy. That’s why not a single member of the legislature, Democrat or Republican, supports it. It’s why not a single candidate Democrat or Republican running for governor, lieutenant governor, treasurer, or secretary of state supports it. The notion that we could operate a modern state while losing half our revenue base simply does not pass the laugh test.

Still, it is a worthwhile exercise to hold the Libertarians accountable for the truth. Here, then, are the claims they make and the facts about their radical proposal.

The Claim: The tax cut is affordable since Massachusetts “is swimming in cash,” with the income tax constituting only 39 percent of state funding.

The Facts: Swimming in cash? Perhaps the Libertarians missed the last state budget debate, when the largest drop in tax revenue in at least 40 years created a budget deficit in excess of $2 billion. As a result of the $1.2 billion Question 4 tax cut that passed in 2000, along with nearly $4 billion in additional tax cuts passed during the 1990s, Massachusetts is facing billion-dollar deficits just to maintain current spending levels  without improving schools or expanding access to health care  for years to come.

It is also important to understand that the $9 billion generated by the income tax  over half of state tax revenue  is not all that’s at stake here. Those state tax dollars are used to leverage $4.3 billion in federal financial assistance. If the state dollars disappear, so does the federal money. Take Medicaid, for example. The state spends nearly $6 billion on Medicaid, primarily to provide long-term care to the frail elderly and disabled. Half of that $6 billion comes from the federal government.

If Massachusetts were unable to finance its share, however, the federal government would pull out as well. And the loss of federal dollars wouldn’t just be proportional to state cuts. Federal law requires states to meet certain spending requirements; if we were unable to do so because of the loss of over half the state tax revenue, we would lose all the federal Medicaid reimbursements. So we could lose as much as $3 billion in federal aid in just this one area and the likely elimination of Medicaid support for elderly people in nursing homes if the loss of income tax revenue made Massachusetts unable to finance its required share of the program. A similar pattern would exist if we were unable to meet our maintenance of effort requirements under federal welfare laws; in this case, we could lose $459 million in federal aid. Thus elimination of the state income tax could mean the loss of perhaps $13 billion in total revenue, or 10 times the size of the Question 4 tax cut. It is absurd to suggest that losses of this magnitude would not affect nearly every aspect of public services and investments.

The Claim: The income tax repeal would “Create 300,000 to 500,000 new jobs in Massachusetts.”

The Facts: The claim that eliminating the income tax would create as many as 500,000 new jobs is laughable. There are currently about 3.3 million workers in Massachusetts, so an increase of 500,000 jobs would mean 15 percent growth  an utterly unrealistic growth rate while the state and local governments would be shedding workers by the tens of thousands.

A little history of the growth of jobs in Massachusetts is instructive. Over the last 20 years, the number of workers in Massachusetts has increased at a rate of 1.3 percent a year, less than one-tenth the level predicted by the Libertarians. Think of it this way. In 1992, at the end of a brutal recession in the northeast, there were about 2.8 million workers in Massachusetts; today there are 3.3 million workers. Thus the public and private sectors in Massachusetts, during the longest economic recovery in history and one of the great economic booms of all time, together created 500,000 new jobs over 10 years. Yet the Libertarians believe that a tax cut alone would have as big an impact as the impact of the entire economy over a decade.

Getting rid of the income tax would eliminate the jobs of tens of thousands of teachers, fire fighters, police officers, and other public employees. That’s hardly the recipe for a job creation strategy.

The Claim: “Massachusetts spending has doubled in the last 10 years.”

The Facts: This is the kind of myth that gets told and retold so many times people actually start believing it’s true. Here are the facts. The state budget for fiscal year 2003 that just passed the legislature totaled $23.0 billion. In 1991, at the end of the Dukakis administration, state spending amounted to $13.6 billion. Thus no matter how you cut it, state spending hasn’t doubled even over 12 years, much less over 10 years.

More important, however, is the impact inflation has had since 1991. Inflation alone has eaten up most of the increase since the early 1990s. After you adjust for inflation, state spending didn’t double, it went up by about one-quarter. That’s a big difference.

Still, if spending increased by one-quarter over 12 years (that’s a growth rate of less than two percent a year), it’s reasonable to ask where that money went. All of that increase in state spending can be accounted for by increases in education and health care, exactly the priorities voters say they want. During the 1990s, Massachusetts improved schools  particularly in low-income communities  by lowering class sizes, recruiting better qualified teachers, and fixing some of the worst school buildings in the nation. We improved health care by dramatically reducing the number of people without health insurance while continuing to provide care for the growing number of frail elderly in nursing homes. And that’s pretty much all the government expansion during the decade. Rather than expanding government, we’ve cut housing programs by two-thirds, cut cash assistance programs by almost 60 percent, cut mental health programs, and cut environmental programs. That’s not the record of massive increases that Libertarians allege.

One other aspect of the growth in state spending should be kept in mind. While state spending grew at a rate of about 1.8 percent a year after adjusting for inflation, personal income in Massachusetts grew by about 2.5 percent a year. In other words, throughout the 1990s and into the new decade, income growth consistently outpaced the growth in state spending. As a result, state spending has taken up a steadily shrinking share of available resources in the state. Workers have been able to keep more and more of their paychecks even without this radical proposal.

The Claim: The income tax repeal would “Give back $3,000 each to 3,000,000 Massachusetts workers.”

The Facts: Don’t go spending your $3,000; the Libertarians wildly exaggerate the savings for most workers. It’s true that there are about 3 million workers in Massachusetts, but only a small share of them would save $3,000 if the state income tax were eliminated. Here’s why. The Libertarians average all income tax payments together to come up with the $3,000 figure. But that includes a small number of very wealthy people who make perhaps millions of dollars in income and thus pay far more than $3,000. Most of us pay less. In fact, fewer than half a million taxpayers would receive as much as $3,000. Each of us, however, would experience the loss of vital public services on which we rely every day.

One thing the Libertarians don’t tell you is that many taxpayers would end up paying higher taxes if the income tax were eliminated. Senior citizens currently get property tax relief up to nearly $800 through the income tax system; even seniors whose income is so low they don’t owe any income tax are eligible for the tax break. If the income tax is eliminated, so is this property tax relief system and many seniors would see their taxes increase as a result. Similarly, low- and moderate-income parents are eligible for a state earned income tax credit if their incomes are below about $33,000. Again, many parents get more back from the earned income tax credit than they owe in state income taxes. Like the seniors eligible for property tax relief, these parents would end up paying more in taxes if the income tax were eliminated.

The Claim: “Tax increases destroy jobs.”

The Facts: If tax increases destroy jobs, how do the Libertarians explain the 1990s? Recall that in 1991, then-President George H.W. Bush raised taxes to balance the budget; many political observers believe this act of courage and rationality in the face of trillions of dollars in national debt cost him his reelection bid. In 1993, then-President Bill Clinton raised taxes again, with every single Republican in both the House and Senate voting against it. The combined tax increases were substantial, and transformed the federal government’s massive deficits into the largest surpluses on record. But if tax increases destroy jobs, shouldn’t the economy have tanked after increases in 1991 and again in 1993?

Of course, that didn’t happen. Job growth after federal taxes were increased in the 1990s was nothing short of spectacular; between 1993 and 2000, there were some 21 million jobs created in the U.S. In the seven years after the Clinton tax increase was enacted, the rate of job growth was substantially higher than nearly any other seven-year period since the 1970s when the baby boom generation was joining the work force. As if that evidence weren’t enough, it is also worth observing that President Bush’s massive $1.3 trillion tax cut passed last year has not exactly lit the economy or the job market on fire in recent months.

None of this is to claim that tax increases necessarily create jobs or that tax cuts cause job loss; if the resources are not wisely invested, tax increases can indeed damage the economy. Still, the lesson from the 1990s should be clear. When tax increases are used to finance investments like education, health care, and other important public services while reducing the national debt, they can help create an environment in which the economy thrives. A healthy private sector still needs a healthy public sector training educated and healthy workers, building a transportation infrastructure to move goods and customers to markets, and ensuring that we are all operating on a fair and level playing field.

The Claim: The proposed tax cut will not affect local services. “Police, firefighters, and local roads are already funded by local taxes,” say the Libertarians.

The Facts: Anyone who thinks cities and towns in Massachusetts can operate independently of the state budget just doesn’t know much about local finances or the state budget. While the property tax is the major source of local revenue, state aid makes up over one-quarter of municipal revenue. In some cities and towns, from New Bedford to North Adams, state aid makes up over half of total revenue. Municipalities across the Commonwealth would face deep budget shortfalls if state taxes were slashed by $9 billion and all local services  from public safety and education to roads and parks  would suffer. It is likely the case that anything deemed nonessential  which would likely include libraries, parks, swimming pools, garbage collection, and so on  would be eliminated, while even essential public safety services and schools would face dramatic cuts.

The current state budget is instructive. During the last set of budget negotiations, faced with a gaping budget deficit and the need for billions of dollars in spending cuts, the legislature passed a $1.1 billion tax increase. Over a third of that tax increase was used to limit the cut in aid to cities and towns that had been proposed before the tax increase was enacted. There is no way around it; if state taxes are cut by over half, cities and towns will lose billions of dollars. The result most certainly would be fewer teachers, fewer fire fighters, fewer police officers, and higher property taxes.

Nowhere in the full-page ad the Libertarians ran in the Boston Globe on August 27 did they deny the impact their proposed tax cut would have on public schools. In fact, when they talk about government’s essential functions, they list public safety, roads, and debt service, along with the state’s constitutional offices. That’s it. Apparently public education isn’t a priority for the Libertarians, even though the state constitution requires an adequate education for every child in the Commonwealth. It’s as though the Libertarians are willing to admit that any plan to slash taxes would bite deeply into the state’s top priority, our ability to provide a good education to every student.

As it is, the state provides just 40 percent of total K-12 education funding in Massachusetts; only nine states provide a smaller share than the Commonwealth. If the state income tax were eliminated, the state would likely provide a far smaller share of total funding, dropping us to near last in the country and putting increasing pressure on the property tax to fund local schools.