Tax Cuts and the Recession in the Massachusetts Fiscal Crisis

Abstract

Massachusetts, like many states across the country, is facing its worst fiscal crisis since World War II. Budget cuts of $1 billion in the last fiscal year have been followed up by cuts of $2 billion in the current one. Rather than raise taxes, the state has slashed key services for the majority of its citizens. The consensus among politicians and pundits is that the problem is the recession, or, alternatively, extravagant state spending in the 1990s. But an analysis of state tax revenue data reveals that the major reason for the budget shortfall is legislated cuts in capital gains tax rates and declines in the yield of the corporate income tax. Without these policy decisions to cut taxes, the state would not be facing a budget crisis. The $4.6 billion foregone in tax revenue, saved in a rainy day fund, would have more than compensated for the $4 billion in spending cuts enacted in the last three fiscal years. Unless the state restores tax rates to previous levels, it will continue to experience serious budget shortfalls and more cuts to essential services. In the future, lawmakers should resist the temptation to cut taxes during boom times. After all, a bust is always just around the corner. Instead of lowering taxes, the state should save excess revenue, then draw on reserves to maintain spending during recessions.