Massachusetts Taxpayers Foundation
24 Province Street, #353, Boston, MA
02108
Phone: (617) 720-1000 - Fax: (617) 720-0799
October 2, 2000
MTF Analysis:
Fiscal Consequences of Ballot Questions 4 and
6
The Massachusetts Taxpayers Foundation today released an analysis of the
potential fiscal consequences of two major initiatives to cut state taxes --
Questions 4 and 6 -- which will appear on the November ballot. According to the
analysis, the almost $2 billion combined impact of these two initiatives would
require major cuts in state programs and services in order to avoid future
budgetary deficits. Looking at Question 4 alone, however, the analysis found
that with slowing but still healthy revenue growth and a return to the spending
discipline of the mid-1990s, the state could manage the proposed tax cut to 5
percent while producing balanced budgets.*
"The MTF analysis underscores the particularly serious consequences of
Question 6," said Foundation President Michael J. Widmer. "While most of the
public debate has focused on Question 4, the outcome of Question 6 will be
critical."
The Foundation opposes Question 6, the proposal to establish an auto
excise/tolls credit. In regard to Question 4, the Foundation supports the goal
of reducing the income tax rate to 5 percent but takes no position on the
specific proposal that will appear on the ballot. Earlier this year, MTF
recommended an alternative plan to tie a gradual reduction in the income tax
rate to growth of the state's economy, rather than to the fixed three-year
schedule provided in Question 4. The MTF proposal was included in the House
version of the 2001 budget but was not adopted in the final budget.
Key Findings of the Analysis
1. Under all but the most optimistic revenue scenarios in the analysis, the
combined impact of Questions 4 and 6 would require extensive cuts of state
programs and services in order to preserve fiscal balance (see Scenario A
below).
2. Primarily because of a resurgence in non-controllable health care costs,
which account for almost one quarter of the state budget, the brunt of the
spending cuts needed to bring the budget into balance would fall most heavily
on discretionary programs such as education and social services.
3. The consequences of the auto excise/tolls tax credit are particularly
serious because Question 6 would take full effect on January 1, 2001, in
contrast to Question 4 which would be phased in over three years.
4. Because revenues are continuing to grow so strongly, the fiscal risks
associated with Question 4 are considerably less than they were even at the
beginning of the year.
5. Under a likely scenario of slower but still solid revenue growth, the
state could produce balanced budgets under Question 4 alone with annual
spending growth of 4.5 percent (see Scenario B below).
6. A 4.5 percent rate of spending growth would represent a return to the
fiscal discipline of the mid-1990s (compared to approximately 7 percent in
recent years), essentially requiring that spending increases in discretionary
programs be held to the rate of inflation.
The Foundation's examination considered a variety of scenarios for future
growth in state revenues and spending. On the revenue side, these scenarios
ranged from a continuation of the extraordinary 10 percent average annual growth
in baseline taxes of the last three years to an abrupt slowdown of tax growth to
5 percent a year. In all the scenarios, the impacts of previously enacted tax
cuts that are still phasing in, including the charitable deduction adopted in
the fiscal 2001 budget, were taken into account. For spending, the scenarios
varied from a continuation of the expansive 7 percent annual budgetary growth of
recent years to an austere 3 percent rate of annual growth, roughly equal to
inflation. The two scenarios discussed below illustrate the analysis that
underlies the Foundation's findings. The results of all 18 scenarios are
attached.
Scenario A
Tax cuts: Question 4 and 6 both adopted
Annual revenue growth: 10% in 2001, 8% in 2002, 6% in 2003 and beyond
Annual spending growth: 7% a year in 2002 and beyond
|
Results of Scenario A ($M) |
FY01 |
FY02 |
FY03 |
FY04 |
FY05 |
|
Projected surplus/(deficit) |
$930 |
(510) |
(1,620) |
(2,450) |
(3,070) |
-
As this scenario shows, the combined impact of Questions 4 and 6 would
produce large and rapidly growing deficits in fiscal 2002 and beyond, if
spending growth continues at current rates and revenue growth moderates over
the next three years.
-
To avoid such deficits, the state would have to cut discretionary programs
dramatically in order to pay for unavoidable health care and other mandated
cost increases, and almost certainly would be unable to sustain its commitment
to funding of education reform.
-
Even if baseline revenues continued to grow at 10 percent annually over
the next five years, a highly unlikely event, spending reductions would still
be necessary to avoid deficits if both Questions 4 and 6 were adopted.
Scenario B
Tax cuts: Question 4 alone adopted
Annual revenue growth: 10% in 2001, 8% in 2002, 6% in 2003 and beyond
Annual spending growth: 4.5% a year in 2002 and beyond
|
Results of Scenario B ($M) |
FY01 |
FY02 |
FY03 |
FY04 |
FY05 |
|
Projected surplus/(deficit) |
$900 |
670 |
280 |
180 |
370 |
-
While the picture for Question 4 if adopted alone is now more positive,
significant risks remain. Revenue collections have been strong in fiscal 2001,
but there is no guarantee as to future growth. Although an economic downturn
is not in sight, factors such as the state's labor shortage, tight housing
market and vulnerability to stock market volatility illustrate the uncertainty
about future revenue growth.
-
While MTF is not proposing any particular rate of spending growth, the 4.5
percent pace would allow the state to fund annual increases in health care
costs averaging 7.5 percent, pay required obligations such as debt service and
pensions, and continue the state's statutory funding commitment to education
reform. At the same time, it would leave little room for expansion of
discretionary accounts such as higher education and human services.
-
If spending continues to grow at 7 percent annually, the adoption of
Question 4 would result in significant deficits under the revenue assumptions
of this scenario. Only if revenue growth continued indefinitely at the current
10 percent annual pace could the 7 percent rate of spending growth be
sustained.
MTF Analysis
Impact of Proposed Tax Initiatives
On Future State Budget Balance
($ million - rounded to nearest $10 million)
I. Combined Impact of Questions 4 and 6
|
Annual Growth Scenarios |
Projected Budget Surplus/(Deficit) by Fiscal
Year |
|
Revenue
All Years
|
Spending
FY02-05
|
FY01
|
FY02
|
FY03
|
FY04
|
FY05
|
|
|
3% |
$160 |
(880) |
(1,190) |
(1,170) |
(870) |
|
5% |
4.5% |
160 |
(1,220) |
(1,880) |
(2,250) |
(2,360) |
|
|
7% |
160 |
(1,770) |
(3,060) |
(4,120) |
(5,000) |
|
|
3% |
930 |
380 |
250 |
500 |
1,060 |
|
10-8-6% |
4.5% |
930 |
50 |
(440) |
(580) |
(430) |
|
|
7% |
930 |
(510) |
(1,620) |
(2,450) |
(3,070) |
|
|
3% |
930 |
710 |
1,270 |
2,290 |
3,770 |
|
10% |
4.5% |
930 |
370 |
580 |
1,210 |
2,270 |
|
|
7% |
930 |
(180) |
(600) |
(660) |
(360) |
In all the scenarios in the analysis, spending in fiscal 2001 is based upon
the enacted budget, while spending in subsequent years is calculated using the
spending growth rate shown for each scenario.
In contrast, revenues in both fiscal 2001 and subsequent years are based upon
the revenue growth rate shown for each scenario. For the three scenarios that
show revenue growth rates of "10-8-6%," the assumed revenue growth is 10 percent
in fiscal 2001, 8 percent in 2002 and 6 percent in 2003 and subsequent years. In
all the scenarios the surplus/(deficit) projections reflect the impact of
previously enacted tax cuts that are still phasing in, the charitable deduction,
and the proposed cut(s).
Impact of Proposed Tax Initiatives
On Future State Budget Balance
($ million - rounded to nearest $10 million)
II. Impact of Question 4 Alone
|
Annual Growth Scenarios |
Projected Budget Surplus/(Deficit) by Fiscal
Year |
|
Revenue
All Years
|
Spending
FY02-05
|
FY01
|
FY02
|
FY03
|
FY04
|
FY05
|
|
|
3% |
$160 |
(280) |
(500) |
(450) |
(120) |
|
5% |
4.5% |
160 |
(620) |
(1,200) |
(1,530) |
(1,610) |
|
|
7% |
160 |
(1,170) |
(2,380) |
(3,400) |
(4,250) |
|
|
3% |
930 |
1,010 |
980 |
1,260 |
1,870 |
|
10-8-6% |
4.5% |
930 |
670 |
280 |
180 |
370 |
|
|
7% |
930 |
110 |
(890) |
(1,690) |
(2,260) |
|
|
3% |
930 |
1,330 |
2,010 |
3,090 |
4,630 |
|
10% |
4.5% |
930 |
1,000 |
1,310 |
2,010 |
3,140 |
|
|
7% |
930 |
440 |
130 |
140 |
500 |
NOTE: In accordance with Title 17 U.S.C. section 107, this
material is distributed without profit or payment to those who have expressed a prior
interest in receiving this information for non-profit research and educational purposes
only. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml
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