October 22, 2008

Every enterprise needs cost and revenue predictability and stability in order to achieve its mission and serve its stakeholders. This is true of a global technology company, an elementary school or a neighborhood health clinic.

Unfortunately, Massachusetts lawmakers have historically missed these opportunities at key points during the past 20 years: Following the economic downturn in 1989, the Legislature raised the income tax from 5% to 6.25%. When it became clear that this “temporary” tax hike was going to be permanent, voters prudently and overwhelmingly (nearly a 60% majority) approved a ballot initiative in 2000 reducing the rate back to 5%. The Legislature overrode this voter approved measure in 2002 as part of a $1.2 billion tax hike package that included a dramatic increase in the state’s capital gains tax (reversing a 1994 capital gains tax law that lowered the capital gains tax). In 2008, the Legislature increased taxes on employers by nearly $500 million.

Meanwhile, broken government service delivery systems drain taxpayer-generated revenue and inhibit our economic growth. Our Unemployment Insurance system (off-budget item) is the second costliest in the nation; the universal health care system is hemorrhaging money and relying more and more on employers for funding; and, as Forbes Magazine recently pointed out (in its support for Question One), Massachusetts has “lavish government pensions with payouts that would bankrupt private companies.”

It is understandable that this legislative record of reversal that further includes disregard of voter approved public campaign financing and charitable tax credit laws would draw a skeptical electorate to more drastic measures. However, despite our support for eliminating the capital gains tax to help fuel our innovation economy, the High Tech Council opposes Question One.

The elimination of the income tax would reduce the sate budget by $12 billion and open a Pandora’s Box of unknown and potentially harmful results. Proponents do not include (by design) any alternative addressing how this impact would be managed, leaving the door open for a swift and uncertain legislative response: Increase the property tax? Establish a graduated income tax? The implication is that voters will see a tax cut without consequence—a premise we dispute.

A recent study conducted by Global Insight advocates voter rejection of Question One and cites the obvious stress on state and local services as a result of eliminating the income tax. However it ignores what motivates voters to consider Question 1 and misses the opportunity to detail the overdue course of action the Legislature and Governor must address regardless of whether Question One is defeated or is approved. We recommend:

  • Eliminating the long-term capital gains tax (as the Legislature approved in 1994)
  • Rolling back the income tax to 5% (as approved by voters in 2000)
  • Reforming the Unemployment Insurance system and, more immediately, a freeze of 2009 rates to avoid a $400 million annual rate increase by 2012
  • Reforming pension and Medicaid systems
  • Eliminating wasteful and redundant spending and promotion of efficiency utilizing a Congressional Budget Office style audit
  • Increasing municipal participation in the Group Insurance Commission to provide cost savings on skyrocketing local health care costs.

Simply defeating Question One should not divert attention from the significant transformation that needs to occur in Massachusetts to enable us to achieve our shared goals, of a globally competitive education system, a fair health care system and a stable and competitive economic climate.