Overspending or Undertaxing?
Understanding the Massachusetts State Fiscal Crisis
by Gerald Friedman, Department of Economics, University of Massachusetts-Amherst
Massachusetts, we are told, faces a catastrophic fiscal crisis that can be solved only by the most drastic spending cuts. Shelters for homeless veterans, health care for the aged, the poor and the unemployed, environmental protection, children’s education: all must be sacrificed to close a $2 billion dollar state budget deficit. This crisis was not a complete surprise. As in other states, rapid economic growth in Massachusetts in the 1990s produced sharp increases in state tax revenue despite a series of tax cuts throughout the decade. Now, the same conservatives who pushed through tax cut after tax cut have a simple diagnosis; the fiscal crisis, they say, is due to overspending by irresponsible politicians. Their prescription follows naturally: sharp spending reductions. The legislature cut $2 billion dollars from the budget for the current fiscal year and emergency cuts in the last months have exceeded half a billion dollars more. These funding cuts are to be followed by billions more.
But before we accept our medicine, we should check the diagnosis that we overspent during the 1990s. Tax revenues did increase in the 1990s, rising by over 17% in real terms between 1990 and 2000 while the state’s population rose by only 5%. Massachusetts used the additional revenues to establish ‘rainy day funds’ for economic downturns, to improve public education, and to increase local aid, allowing local governments to reduce property taxes. But the 22% increase in state and local spending was well below the 37% rise in personal income during the 1990s. This spending restraint made possible tax cuts that reduced state and local taxes from 10.6% of personal income down to 9.1%.
These tax cuts were not evenly distributed but were focused on taxes paid by higher income residents. At the same time that the state was reducing income and corporate taxes, it increased specific sales taxes, such as that on cigarettes, and raised more from the state lottery. Borne largely by lower income residents, increases in these latter revenue streams helped to finance tax cuts for businesses and for our wealthier citizens.
In Massachusetts, as in most states, the magnitude of the current state fiscal crisis is due to a decade of tax cuts. If Massachusetts had collected the same share of personal income in taxes in 2000 as it did in 1990, state and local revenues would have increased by nearly $4 billion, $2 billion more than the current deficit. Had the federal government maintained its support for state and local governments, rather than cutting expenditures to fund tax cuts, state revenues would have increased in 2000 by another $1 billion. With $5 billion, the state could have adequately prepared its rainy-day fund for the coming recession while funding education and other state programs.
It may be that the citizens of Massachusetts want more private consumption at the cost of fewer government services. I would invite politicians who believe this to campaign honestly on such a platform, campaigning against public education, health, and infrastructure. Until they join this debate, they should stop falsely accusing their predecessors of fiscal irresponsibility when their real mistake was in cutting taxes for the rich.
United States, Department of Commerce, Statistical Abstract of the United States, 1990, Tables 34 (population), 712 (income), 463 (state taxes and federal grants), 466 (state lottery), 469 (local taxes), 460 (state expenditures).
United States, Department of Commerce, Statistical Abstract of the United States, 2001, Tables 21 (population), 651 (income), 437 (state taxes and federal grants), 443 (state lottery), 439 (local taxes), 438 (state expenditures).
(c) 2003 Center for Popular Economics