and the
Citizens Economic Research Foundation


Governor Jane Swift
Speech to the Massachusetts Taxpayers Foundation

Tuesday, March 19, 2002

Thank you for inviting me to join you this afternoon. As you have for almost 70 years, the Massachusetts Taxpayers Foundation is playing an important role in the fiscal debates we are having on Beacon Hill. Given that the Legislature has yet to offer any concrete budget proposals, Michael Widmer and this organization have been my “loyal opposition” for the past several months. To your credit, you are actively working to shape what I believe is a moment of great decision in the Commonwealth’s history. I see two very stark choices: We can reverse the progress of the last 12 years; or we can continue to build on the state’s solid economic foundation with pro-growth, pro-jobs, pro-family policies.

The issues we are talking about are familiar to all of us. We faced many of them almost a dozen years ago. And because we made the right decisions then, we are better off today. While we face a severe fiscal situation once again, this time, the Massachusetts economy is fundamentally healthy, resilient, and diverse. Crisis forced us to develop good habits of fiscal discipline. And crisis woke us up to the benefits of competitive tax policies.

In the last decade, we’ve reduced per capita spending growth to the ninth lowest in the nation, and we cut taxes 42 times for businesses to promote job creation and stability for Massachusetts families. We’ve made important investments in the state’s infrastructure. And we aggressively built up our reserves to an impressive 3.1 billion dollars. Both Wall Street and Main Street have confidence in our ability to manage public dollars fairly and responsibly. Massachusetts has seen nine bond upgrades.

Under three consecutive Republican governors, state government has worked hand-in-hand with the business community to attract a diverse array of industries to Massachusetts. We no longer rely on a few large employers. Defense systems and computer mainframes have been eclipsed by an explosion of technology, health care, and financial services companies, as well as thousands of small to medium-sized businesses. A 1997 New York Times article summed up our success: “This region has transformed itself through pluck and brains…No miracle of growth this time.”

These aren’t abstract achievements. They translate into a higher quality of life and good jobs for Massachusetts families. Even in this recession, we have the lowest unemployment rate of any industrial state. And it remains below the national average – where it’s been for the last six years.

Beyond the numbers, though, the experience of the last fiscal crisis – and the recovery that followed – had a profound impact on the political culture in Massachusetts. The “Taxachusetts” moniker undermined the confidence of a proud people. Both Democrats and Republicans realized that it is fiscal discipline – and not runaway spending – that enables government to meet society’s most pressing needs in the long term. And we came to a bipartisan consensus that tax cuts – not tax increases – generate growth and jobs.

Massachusetts Taxpayers Foundation played an important role in fostering this new understanding. The state’s business leaders were ardent advocates of tax cuts, particularly when it came to those that helped create a more prosperous commercial climate. Who could blame them? They had witnessed a total failure of leadership on Beacon Hill in the late 80s when it took the Governor and the Legislature almost two and a half years to agree on the magnitude of the crisis.

Ultimately, their solutions were irresponsible short-term borrowing and a series of job-killing taxes: Capital gains increased from five to six percent. The gas tax jumped a full 10 cents to 21 cents. And the Legislature sought to impose a sales tax on hundreds of professional services – your services – that was only repealed with the election of a Republican Governor and 16 Republican Senators. Most damaging, the personal income tax increased from five percent to a high of 6.25.

The result was devastating. Between 1988 and 1992, we lost 400,000 jobs. Per capita, this was the highest job loss in the nation.

These events shaped my first years as a state Senator. And they are shaping the way I view today’s fiscal problems. When I see a list of 16 possible tax increases coming out of House Ways and Means totaling almost 2 billion dollars, the sense of déjà vu is horrifying, particularly when you comb through the list and realize that most of them hit hard working middle class families.

My top concern right now is that we not repeat the mistakes of the past, particularly as Massachusetts emerges from this current recession. Instead of raising taxes, I’ve come up with a pragmatic fiscal plan that cuts spending, utilizes the state’s reserves, and taps new sources of revenue over a four year recovery period. Allow me to briefly walk through these ideas with you.

As always, our first step is to reduce spending. You’ll remember that four days after learning that January revenues were down 18.4 percent, I used my 9-C authority to cut spending by 155 million dollars. For fiscal year ’03, the cuts will have to be deeper. I’ve proposed a total of 1.2 billion dollars, with each agency contributing between three and five percent in savings. I have asked the Legislature to free our managers from the expensive stranglehold of earmarks and line item constraints, so they can use common-sense management practices to find savings in places that least impact services.

To close the books on this fiscal year, I am proposing that we use 400 million dollars from our reserves, which now total 2.5 billion dollars. I’m including the funds Massachusetts receives each year as part of the tobacco settlement in that number. Like many other governors, I see no reason to let these dollars sit and earn interest while they can be used to help provide medical care to children and seniors.

Under my plan, we’ll use 800 million dollars next year, then another 860 million over fiscal years ’04 and ’05. Some of my assumptions may change, but with full structural balance achieved, we will still have 440 million dollars left in the bank for emergencies and future shortfalls. If you add to that our ability to leverage future tobacco dollars, the total is over 1.5 billion dollars.

To fill the budget gap, I’ve proposed tapping two new revenue streams, both of which I view as common sense alternatives to raising people’s taxes. By refinancing the state’s pension obligation to the year 2028, we free up 134 million dollars annually. During better days, we took the opportunity to speed up the contributions to 2018. But we can no longer afford to be that aggressive. Other states, including California, North Carolina, and Maryland have already taken this step. And the agencies that rate state bonds have specifically and repeatedly approved the move.

Second, it’s time to reign in our Lottery system. By changing the prize payout by eight percentage points, the state sees an additional 274 million dollars a year. There is no need for Massachusetts to have the highest prize payout in the country – a full 71 percent – particularly when the system has strayed from its original mission. Just in the last three years, the Lottery took in an additional 700 million dollars, but aid to cities and towns has only received 13 percent – or 90 million dollars – of those funds.

I propose reducing the prize payout by just eight percentage points, which will generate 274 million dollars for local aid. This number is based on the Lottery’s own projections when they explored this option in 1989. It takes into account an eight percent decline in sales that may occur. With these changes, Massachusetts will still be the 4th largest prize state in the country. With money in short supply, I see no need to maintain a distinction that is really no distinction at all.

Together, these two proposals – pension refinancing and Lottery restructuring – would bring in more combined than freezing the income tax and raising the cigarette tax. These proposals show that Massachusetts has choices when it comes to balancing the budget. The answer does not have to be tax increases. In fact, tax increases are an easy solution that produce long and short-term problems for our economy and our families. I thought we had learned this lesson a decade ago.

Here is where MTF and I part company. Sometimes good minds disagree.

I find MTF’s proposals potentially damaging and to some extent disingenuous for very specific reasons: First, any plan to increase taxes, particularly when we have reserves available is unwise. Taking money away from small businesses and families endangers the Commonwealth’s chances of enjoying a full and robust recovery. But to propose increasing the income tax to 5.6 percent or halving the personal exemption is not just bad fiscal policy; it is grossly unfair to those who can least afford to pay. Halving the personal exemption I find regressive at best.

These proposals also beg important questions: Why is this organization aggressively advocating for a plan that is not only fiscally unsound, but flirts dangerously on the edge of self interestIf raising taxes is such an excellent idea, where are the proposals to eliminate the myriad of business tax cuts and credits that have contributed to growth and prosperity throughout the last decade?

They don’t exist, and for very good reasons. They hurt the state’s competitiveness ... our ability to create and maintain good jobs. Raising business taxes would hurl us right back to the economic Stone Age. But so would increasing the income tax. The families of Massachusetts have every right to a tax rate that allows them to thrive … that allows them to raise their children with their own hard-earned money. To quote a line from Ronald Reagan, we need to focus on “those millions of unsung men and women who get up every morning and send the kids to school ... go to work ... try to keep up the payments on their house …pay exorbitant taxes.” Massachusetts still has the highest per capita income tax rate in the country. And we are sixth highest in terms of tax as a percentage of income. These numbers don’t help us attract and keep good workers.

And you and I know that the income tax is also a small business tax. Two hundred and sixteen thousand small businesses would be hurt by raising income taxes. This includes the self-employed, who pay taxes based on the personal income tax schedule. And the shareholders of over 9,000 Subchapter S corporations, who pay taxes on the net income of the company – whether or not they see the profits. These small businesses are the economic engine of our Commonwealth. They have provided the diversification I spoke about earlier, the diversification that is now protecting us from the harsher winds of recession blowing through other states. Taxing them at a higher rate places jobs and stability at risk.

Families and small businesses should not be asked to pay a disproportionate price when there are workable, reliable funding streams available that ask no more of any citizen, rich or poor. I expect such proposals from the Legislature. In more ways than one, that body is stuck in a time warp. But what MTF has done is use its excellent reputation to legitimize their tax frenzy.

I spoke earlier of cultural change and MTF’s role in creating an innovative new mind set to Beacon Hill. And the business community’s role in spreading it throughout the Commonwealth. That’s why you’ve stood by smart policies like the MCAS graduation requirement. Now is not the time to waiver on the fiscal, economic and tax strategies that have served us so well.

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