Cutting Taxes Behind Enemy Lines: The Massachusetts Experience

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Cutting Taxes Behind Enemy Lines: The Massachusetts Experience

April 28, 2000 18 min read
The Paul Cellucci
Policy Analyst


Reducing the size and scope of the federal government and lowering the federal tax burden imposed on our citizenry has not received the appropriate attention or respect from either the President or the majority of this Congress.

Thankfully, however, many governors are striving to reduce their state bureaucracies, looking for privatization opportunities, championing parental choice and local voices in education, and cutting the state tax burden of their citizens.

We have one such governor with us today--Governor Paul Cellucci of Massachusetts--who has worked to cut taxes in his state 38 times.

Governor Cellucci testified this morning before a congressional committee about tax policy, and he is leading the initiative to roll back the income tax in his state. We welcome him to Heritage this afternoon to speak about "Cutting Taxes Behind Enemy Lines."

Becky Norton Dunlop is Vice President for External Relations at The Heritage Foundation.


Thank you very much, Becky. I'm delighted to be here. I want to thank The Heritage Foundation for allowing me this opportunity. I was just over at the Senate Budget Committee arguing for a ban on taxing e-commerce.

Governor Gilmore from Virginia and Governor Owens from Colorado and I are waging a lonely battle at the National Governors' Association. They're all afraid of losing a little bit of sales tax revenue. I'm more interested in job creation and prosperity here and around the globe that will come from this new powerful tool of commerce.

I want to talk to you today about a very popular topic, and that is tax cuts. The President and many of the presidential hopefuls all have their own tax cut proposals, but I'll focus my remarks on what I'm doing to cut taxes in Massachusetts.

Goodbye "Taxachusetts"

I know what you all must be thinking, Massachusetts and tax cuts? You thought those words could not possibly be mentioned in the same breath, but that was a decade ago. Believe it or not, in the last nine years in Massachusetts we've cut taxes 38 times. It hasn't been easy.

Bill Weld and I, and now Lieutenant Governor Jane Swift and I, have managed to push the legislature--in which Democrats now outnumber Republicans about 6 to 1--to cut taxes and to recognize their importance for continued growth and prosperity.

When Bill Weld and I came into office in 1991, the words "cutting taxes" were not part of the legislature's vocabulary. Massachusetts was better known as "Taxachusetts." The state, like the nation, was in a deep recession, but in Massachusetts that recession got even deeper because in the late 1980s the legislature tried to tax and spend its way out of a fiscal crisis. We had, in 1991, the highest unemployment rate in America. Our bond rating was ranked dead last among the states, just one notch above junk bond status.

The people of Massachusetts were fed up with having the state's budget books balanced on their backs, and businesses were frustrated with a tax code that discouraged new investment. All of those things led to a strong appetite in Massachusetts for tax cuts.

So, we rolled up our sleeves and sent tax after tax onto the chopping block. We repealed the sales tax on services. We eliminated the tax on long-term capital gains. We put in place one of the most generous research-and-development tax credits in the country. We eliminated the tax on Internet access and in the summer of 1998 passed $1 billion in tax cuts.

That was the largest tax cut in our state's history. It included reducing the tax on unearned income from 12 percent to 5.95 percent, which is the tax on earned income. We worked cooperatively with the legislature to pass these 38 tax cuts which are pumping nearly $3 billion into our economy each and every year.

During this time, we changed the debate on Beacon Hill. Even liberal Democrats were touting their own tax cut packages. In Massachusetts, that's when you know things have changed. Democrats could no longer ignore the obvious. Tax cuts were doing wonders for our economy. They are continuing to benefit our state. Today, we have a thriving high-technology industry. We've created 450,000 new jobs, and we have the lowest unemployment rate of the big industrial states at 3.1 percent. We have also just had our bond rating upgraded for the fourth time in eight years by Moody's Financial Services.

Targeting the Income Tax

Despite each and every one of those 38 tax cuts, Jane Swift and I believe we must continue to reduce the burden on taxpayers. We want to provide permanent, significant tax relief for the people of our state in the form of a major cut in the state income tax.

Despite the overwhelming evidence of support for this tax cut, the legislature, however, seems to think we don't need it. We know we're on the right side of this debate. Despite our efforts in cutting taxes, lowering unemployment insurance rates by more than a billion dollars, cutting worker's compensation rates in half, restructuring the electric industry, getting reductions in electric rates, and eliminating needless regulations, Massachusetts remains a high-cost state, particularly in the area of taxes. We have the highest personal income taxes of any industrial state. We are the fifth most heavily taxed state in the nation. And local, state, and federal taxes consume a larger share of a Massachusetts family's budget than almost anywhere in our country.

During the tax-and-spending spree in the late `80s that I mentioned earlier, one particular tax was hit, the income tax. In 1989 it was raised from 5 to 5.95 percent. Yet at the time, Governor Dukakis and the lawmakers promised that the increase would be temporary, and it would be returned to its previous level once good economic times returned. Today, 11 years later, despite our clamoring for the tax cut, the legislature has refused to lower the rate to 5 percent. And the good times don't get much better than what we are enjoying today in Massachusetts.

By conservative estimates, we are three years removed from the troubles. That's when our fiscal recovery bonds, which were issued to pull Massachusetts from its economic morass in the late `80s were finally retired.

On the issue of keeping a promise, the legislature has turned a deaf ear to us and to the people of Massachusetts. They seem to believe that our tax cutting days are over. They did offer meager tax cuts in the last budget to try and quell the clamor for our tax cut, but they weren't nearly enough. They cut the income tax from 5.95 percent to 5.75 percent over a 3-year period. Our proposal is to go from 5.95 to 5.6 to 5.3 to 5.0 over 3 years, while the legislature would rather spend more of the taxpayers' money to bloat the state budget. They appear destined to repeat the mistakes of the past.

But, I'm not willing to let fiscal calamity be Massachusetts' destiny. I want to take Massachusetts forward and protect our economy against bad times. The way to do that, I believe, is by cutting the income tax to 5 percent. I believe it will secure our economic future.

For years, I have argued for this tax cut, but I think I reached the point of no return last spring when the Taxation Committee, a joint committee, House and Senate, was hearing testimony on tax bills, and they left mine off the calendar. The hearing was actually the day before April Fool's Day, but I know the omission was no joke. I've never been one to crash the party, but I did crash that hearing, and I know the chairpersons of the Taxation Committee, Democratic legislators, were not too happy to see me there.

But as is the tradition at legislative hearings, the governor gets to speak first, and I did speak first, and I did not testify on the bills that were before the committee. I spoke on behalf of the bill that Lieutenant Governor Swift and I had filed to roll the income tax back to 5 percent.

Let the People Decide

After those shenanigans, I made up my mind to take this issue to a different audience, the audience that matters most, the people of Massachusetts. I decided that if the legislature won't cut our taxes, we'll do it ourselves. Last summer Jane Swift and I led a petition drive to get an income tax rollback referendum on the ballot this coming November. We collected nearly 150,000 signatures, and now we are assured that the people will have this opportunity to directly weigh in on an issue that affects their daily lives. I believe that the referendum will pass.

Despite Massachusetts' reputation as a liberal state, there is an inherent conservatism in voters who want to prevent government from engaging in a feeding frenzy with their money. In the early 1980s voters approved what we called Proposition Two and a Half, which limits the ability of cities and towns to increase local taxes. I think people at the national level should take notice of our ballot initiative and our past success in cutting taxes. After all, if you can cut taxes in Massachusetts, you can do it just about anywhere.

If Massachusetts passes a major income tax cut overwhelmingly, I think it will be an excellent indicator that people who say there is no support for tax cuts are out of touch.

The debate about the size of the federal income tax cut probably won't be settled by November. If we are successful in our ballot initiative, I think it will be a catalyst for the continuing debate in 2001. It has been my experience that the people in my state do want lower taxes, and if they want a tax cut in my state, I can tell you they want one across this nation.

Can We Afford It?

Opponents of my tax cut proposal are already out in full force trying to convince the citizens of Massachusetts that it is not affordable. They claim you can't cut taxes and fund the necessary programs for children and families. It's the old "if we don't raise taxes people will die in the streets" argument. They're wrong, and we've proven them wrong.

During the times we've cut taxes 38 times, we've increased spending on education seven years in a row, and today we are spending $3.8 billion on state aid to local school districts. That's more than double what we were spending eight years ago, which was around $1.5 billion.

I might add that in addition to providing the money for our schools, we have required accountability. We've put in place standards, and we're testing our students because we want to make sure that our kids are meeting those standards. So, it's not just the money; it's the accountability that goes with it.

We've also delivered a record number of local aid payments to cities and towns and expanded our state's Medicaid program to reduce the number of people uninsured, particularly children, and we've made great progress in Massachusetts in taking our uninsured population from over 700,000 to well below 500,000 citizens over the last several years.

Furthermore, Massachusetts is flush with more than $4 billion in reserve accounts. We have $1.4 billion in the rainy day fund. This fund had a zero balance back in 1991. We have $1.8 billion in the unemployment insurance trust fund. And, in a study sponsored by the Center on Budget and Policy Priorities, a liberal Washington think tank, Massachusetts was named one of only eight states that could sustain a national economic downturn without raising taxes or reducing state services.

Those who are asking if can we afford this tax cut are looking at the issue from the wrong end of the telescope. The real question should be: Can the taxpayers afford to have us continue to go the way we are, Can our economy continue to grow without again reducing the cost of doing business? After all, taxpayer money is not the government's money, it is the people's money. We can't, nor should we, ask people to work any harder to pay for the growth of government; there aren't any more hours left in the day. Instead, we have to put on the brakes.

Who Will Benefit?

Our income tax rate is tough on families. Child care, college tuitions, and groceries squeeze every last dime out of a family's pocketbook. Taxes only add to that burden. Our income tax cut will save the average family of four $600 per year. That's money that will buy clothes for the kids or help with the mortgage payments. The people of Massachusetts should not have to continue to pay for the fiscal mismanagement of a decade ago. They deserve to be beneficiaries of good economic times.

Most important, this tax cut is necessary to prolong our economic prosperity. High taxes drain money from our economy. While Massachusetts' fiscal situation is solid, there are still regions in our state that have not realized their full potential. These regions need investment and lower taxes to stimulate economic growth.

Lower taxes are a significant factor in business location decisions. Right now we have the second-highest effective income tax rate in the nation. Because of that, Massachusetts is operating with one hand tied behind its back. We are competing with neighborhood rivals like New Hampshire and high-tech competitors like Texas, which have no income tax.

Cutting the income tax would allow us to move from fifth to tenth in the rankings of most heavily taxed states. It would allow us to leapfrog Michigan and California and put us neck and neck with New York, three direct competitors for jobs in high-tech and financial services industries. It would make us more competitive in the global economy of the new century.

Contrary to popular belief, the 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. We've seen tax cuts stimulate growth statewide in Massachusetts.

Slashing the personal income tax is the best way to facilitate business growth and recirculate $1.4 billion a year to our commercial markets. It will help build businesses in the areas that were hit hardest during the last recession, and it will create jobs and opportunity across our state.

The Beacon Hill Institute for Public Policy Research, which I know is working with The Heritage Foundation to combine resources to evaluate state tax policies, has estimated that when our tax cut is fully implemented it will help create nearly 100,000 jobs and swell payrolls by over $4 billion. It is clear that the price of our tax cut is small in comparison to the potential rewards.

Reining in Government

The tax cut is also critical to keep government spending under control. We have to take revenue off the table, or else our legislature will inevitably find ways to spend it. Government is not better suited to handle people's money. It is money we'd rather have citizens investing in our economy and using to raise their families.

The notion that government is entitled to this taxpayer money is exactly the kind of mentality that legislators use to justify their spendthrift ways. It was a spending bonanza that led to the last terrible fiscal crisis Massachusetts endured. It led to raising the income tax in the first place. That tax hike was supposed to be temporary. I know because I was in the state senate at the time fighting tooth and nail against it. Eleven years is not my idea, or anyone's idea, of temporary.

Honoring the Promise

The legislature would like everyone in my state to forget about its promise, and some lawmakers are even trying to say that the promise was never made. Unfortunately, in Massachusetts the legislature is perpetuating the public perception that politicians can't make good on a promise. It is important for taxpayers and the business community to believe what the people they elect tell them. But in Massachusetts the time has passed for the legislature to earn back that trust.

Getting this issue on the ballot is a different way to prove to our citizens that government can work, and that it does understand the burdens of working families. I don't expect the legislature will jump on board and keep its promise on the Cellucci-Swift tax cut before November, but I do believe we will beat them at the ballot box and cut our own taxes.

Cutting the income tax is about principle, promise, and prolonging the prosperity. It's about doing what's right for our economy and for our families. Massachusetts has come a long way in the last several years. It's happened with a Republican in the corner office working with a Democrat-controlled legislature. As I said earlier, we have worked cooperatively before, and I know we will continue to work together on many issues. But refreshingly, in the first national election of the new millennium, the people themselves will decide this important issue.

It won't be about the legislature or the governor. The people will decide what to do with their money. I believe they will endorse the income tax cut overwhelmingly and keep our state on course for prosperity in the 21st century.

Q & A

QUESTION: Governor, some of us didn't have the good fortune of making it into the hearing room over at the Senate today. Could you share with us a little bit of what you told the Senate Budget Committee on the issue of taxing the Internet?

GOVERNOR CELLUCCI: Well, the main point that I was trying to make was that--it would be a mistake to tax e-commerce. The Internet is a powerful tool of economic growth that is creating jobs in my state. We have some Internet companies that are adding 20 employees a month. They're creating jobs. They're creating prosperity in Massachusetts, in many states, and around the globe.

And, I'll tell you this: In my state in the last six months of 1999, sales tax revenues were up 8 percent. This is despite all the e-commerce. So, I'm not so sure there's any evidence, anywhere in the country that there's been a drop in sales tax revenue. It hasn't happened yet, and I'm not so sure that it will happen.

QUESTION: Governor, I wondered if you could tell us about the constituency for tax cuts in Massachusetts. Are grass-roots groups getting involved?

GOVERNOR CELLUCCI: We have a pretty difficult referendum or initiative petition process in Massachusetts. We needed 57,000 signatures to get this tax cut on the ballot, and Jane Swift and I put our political organizations together with the state Republican Party, with Barbara Anderson, and with the Citizens for Limited Taxation, a taxpayer advocacy group, to get the job done.

We worked together and we got almost triple the number of signatures we needed. I talked to legislators who were in their communities, at the malls, at the post offices collecting the signatures. They said it was easy. When you told people this is to keep the promise to get the income tax back to 5 percent, people jumped at signing the petition.

Mass Insight did a poll just about 6 or 8 weeks ago, and they asked if lowering the income tax to 5 percent were on the ballot, how would you vote. Seventy-two percent would vote yes and 18 percent would vote no.

So, I think we're in a strong position. We're going to run an aggressive campaign of arguing that it keeps the promise, it helps families, it helps our economic competitive position, and it disciplines the state legislature and state government. We're going to be very aggressive because we know that the teacher unions, the AFL-CIO, the president of the senate and others are going to be rallying against it.

They insist that if we cut taxes people will die in the streets, the kids will suffer, and we won't have education anymore, which we've pretty much debunked the last seven years. We've been cutting taxes. We've been setting priorities in state government, improving our schools, expanding health care, and by emphasizing work, we cut the welfare rolls in half. We've shown that it's not a zero-sum game; that if you set priorities, you can meet the needs of your state while at the same time making sure you have a tax structure that allows the economy to grow and to continue to create the jobs and prosperity you need.

So, I think there is strong support in Massachusetts for this tax cut. As I mentioned in my remarks, I think a lot of the people in the media like to say people aren't interested in tax cuts. People are interested in schools and health care. They're interested in paying down the debt and making sure Social Security is sound and making sure Medicare is there for senior citizens. But, they also don't want what we saw in the State of the Union last week when President Clinton was spending, I think, $2 billion a minute.

I think we can really set the debate with a big vote in support of this income-tax cut in Massachusetts. We've taken the old "Taxachusetts" label and driven a stake through its heart, and we're going to keep that stake firmly in place.

QUESTION: Governor, you've had success cutting taxes with a liberal legislature. What is your opinion on why Democrats and Republicans here in Washington are having such difficulty doing the same thing?

GOVERNOR CELLUCCI: Well, I think part of it is that we focus more on results, and we haven't been as partisan as the parties have been here in Washington. Governor Weld and I worked with the Democratic legislature. When we won in `90, a lot of people in the Republican Party wanted us to have a scorched-earth policy. You know, these Democrats really have messed things up, so let's keep hitting them over the head day after day after day. But Weld and I said we have a big problem in this state. We have the highest unemployment rate in America. We have the lowest bond rating of any state in the country. We have got to get this state back on course.

I think because things were so bad, and because we were the first Republicans to win the governor's office in 20 years, the Democrats realized that we had to work together to get Massachusetts back on course. And basically, it's been a Republican agenda for the last nine years, cutting taxes, fiscal discipline, reforming welfare, tough law-and-order approach, insisting on accountability and standards in education.

But, now that the times are good again, what I'm noticing is the liberal Democrats are starting to push back a little. They're very much opposed to this income-tax cut to 5 percent. They want to weaken the work rules that we've put in as part of the welfare reform. And Tom Birmingham, the Senate President, is thinking of running for Governor.

--The Honorable Paul Cellucci is Governor of Massachusetts.


The Paul Cellucci

Policy Analyst