It’s Massachusetts’ version of the federal tax debate that bitterly divided Congress: Will tax increases of the kind recently proposed by Governor Deval Patrick help or hurt the local economy?
And much like the federal debate, economists disagree. Some support the governor’s plan, lauding it for creating jobs and making the state more attractive to businesses, while others object to raising taxes on the heels of federal tax increases.
“I think it’s really positive in terms of the impact it will have,” Northeastern University economist Alan Clayton-Matthews said of Patrick’s proposal, citing the benefits of a better-educated workforce.
But Brian Bethune, an economics professor at Gordon College in Wenham, disagreed, saying tax increases would hamper economic growth.
This is “one of the worst ideas I’ve heard in a long time,” Bethune said.
Patrick’s sweeping plan would raise the state income tax from 5.25 percent to 6.25 percent while cutting the sales tax from 6.25 percent to 4.5 percent. The plan would also eliminate 45 personal tax deductions worth $1.3 billion annually, including deductions for T passes, college scholarships, and dependents under age 12. Some corporate tax benefits would be eliminated, while the governor would also raise fares and tolls on the MBTA, the Massachusetts Turnpike, and other roads.
If approved, Patrick’s plan would result in higher taxes for about 50 percent of the state’s residents, with the largest increases on high-income households. Taxes would be lower for households with annual incomes below $38,000, but higher for people earning more, with the biggest average increases for those earning more than $103,000 annually.
Workers at every income level recently received a small hit to their paychecks when Congress allowed a temporary decrease in federal payroll taxes to lapse. The tax reduction had meant about $822 a year in savings for taxpayers earning between $50,000 and $75,000 a year.
The federal government also recently increased the top tax rate for married couples earning more than $450,000 and individuals earning above $400,000; Massachusetts has a higher proportion of high-income taxpayers than most other states.
Both the national and state economies are growing at a slow pace. Although Massachusetts weathered the 2008 recession better than the nation, largely due to the strength of its technology industry, a slowdown in exports and uncertainty about US fiscal policy have weighed on growth. Unemployment inched up to 6.7 percent in December, compared to 6 percent in May. The US unemployment rate was 7.8 percent.
Patrick proposed using the $1.9 billion in new tax collections for a major public works program, including building or modernizing schools, roadways, and rail lines, as well as to stabilize the finances of the troubled Massachusetts Bay Transportation Authority.
Clayton-Matthews said the state economy is expected to improve in 2013, and that Patrick’s proposal will help, giving the state a “modest” short-term boost thanks to increased spending on public works and education that will create jobs. The biggest benefits, however, will be long term, he said, arguing that a fixed-up infrastructure and stronger education system will make the state more attractive to businesses.
Clayton-Matthews said unemployment in Massachusetts remains highest for those who hold a high school education or less, and the state will need qualified workers in preparation for an onslaught of retirements among baby boomers.
“That impacts higher [worker] productivity, which helps us attract business, higher incomes and lower the rate of poverty,” he said.
Bethune argued that Patrick’s plan would take money out of the private sector and into the public, where the benefits may not be seen for years. He said such a “tax-and-spend program” comes at a time when Massachusetts leaders should be focused on job creation.
“If the Massachusetts economy was moving along, I’d say maybe this would work,” Bethune said. “The focus should be on an environment that creates more innovative enterprises.”
Patrick’s plan also comes as Congress debates significant cuts to federal spending, particularly to defense and research programs that are a large part of the Massachusetts economy. Economists at the University of Massachusetts have said if the cuts outlined by Congress are enacted, the state could lose 50,000 or more jobs in the next several years.
Patrick Armstrong, an economist at Moody’s Analytics, a West Chester, Pa., forecasting firm, said the governor’s plan could have a “modest negative impact” on the state’s economy, but would not derail it or send it into a recession.
Although it could slow consumer spending in the short term, “a bigger risk is the longer term,” he said, is that “Massachusetts is already a high-cost-of-living place.”
Associated Industries of Massachusetts, the state’s largest business group, issued an initial review of the governor’s proposal last week in which it worried the tax rate increases would make it more difficult for employers in key industries to retain engineers, software programmers, and other high-income employees if they are recruited by businesses in states with lower tax rates.
AIM also said the proposal poses risks to some types of smaller businesses that pay taxes at individual tax rates.
“Debate about taxes and the appropriate funding of government remains a touchstone of Massachusetts politics,” it said, “as the need to fund roads, bridges, public safety, and education tugs against the specter of ‘Taxachusetts’ choking the life out of the economy.”
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