The Boston Phoenix
March 5 - 12, 1998


Show me the money

Eight years ago the state promised a $1.3 billion tax hike would be temporary. Fulfilling that promise now would wreck the budget. Care to guess where your tax dollars went?

Bad Breaks by Dan Kennedy

Massachusetts taxpayers are being taken for fools. Again. Eight years ago, faced with a gaping, recession-fed budget deficit that marked the end of the Massachusetts Miracle, then-governor Michael Dukakis and the legislature pushed through the biggest tax increase in state history. The centerpiece of the $1.3-billion-per-year plan: a boost in the personal-income-tax rate from 5 percent to 5.95 percent.

At the time, a number of officials -- including Dukakis and then-Senate Ways and Means Committee chairwoman Patricia McGovern, now a candidate for governor -- vowed that the tax hike would be repealed when the state returned to fiscal health.

It never happened.

Now it's an election year, and everyone's saying that this time it's going to be different. The leading candidates for governor are promising, give or take a few specifics, to phase out the income-tax hike and to cut other taxes as well. (See "Promises, Promises," page 11.) Putting teeth into those promises is an initiative petition by Citizens for Limited Taxation and Government (CLT&G) that would knock the rate back to 5 percent within three years. It's not yet clear whether the petition will make it onto the November ballot. But if it does, then voters can guarantee themselves the tax cut that politicians are merely promising.

"The first priority is to keep your word," says Barbara Anderson, CLT&G's codirector. "There is no excuse at this point not to keep their promise and roll back the income-tax increase."

Indeed, the argument for a tax cut seems both logical and reasonable. After all, the income tax was just 5 percent during the 1980s. Why shouldn't that be enough today?

Yet there's overwhelming evidence that a massive rollback in tax rates would have immediate and ugly consequences.

The reason: Dukakis's Republican successor, William Weld, took $1 billion of the Dukakis tax hike and gave it away, mostly to corporate interests and the wealthy.

The money, in other words, is gone. And hardly anyone is talking about this unprecedented rip-off.

No doubt that's got more than a little to do with the fact that Anderson and the gubernatorial candidates are running around telling voters that the income-tax hike can now be eliminated without causing any pain. If that's the case, then why should anyone worry about the tax cuts Weld pushed through for his rich friends?

Trouble is, the notion that we can afford another billion-dollar-plus tax cut is a lie -- whether those saying so realize it or not.

It's true that Massachusetts, in the midst of a boom, will run up a budget surplus in the hundreds of millions of dollars for the third consecutive year. But a plan to cut the income tax to 5 percent would, when fully phased in, cost the state $1.3 billion a year -- nearly 10 percent of all tax revenues. Add in the other goodies that are bandied about, such as a reduction in the tax on unearned income (interest, dividends, and short-term capital gains) from 12 percent to 5 percent, and the annual impact on the budget would be somewhere between $1.5 and $1.7 billion.

The state could have afforded that if Weld and his lieutenant governor (now acting governor), Paul Cellucci, with the acquiescence of the Democratic legislature, hadn't pushed through regressive tax cuts totaling $1 billion a year. But now, even with continued economic growth, a wide range of observers -- from fiscal watchdogs to social-service advocates to House Speaker Tom Finneran -- agrees that the state cannot possibly afford such a revenue drop without triggering massive budget cuts and, inevitably, a new round of tax hikes.

"It's impossible to defend with a straight face the notion that we can afford a billion six," says Ed Moscovitch, president of Cape Ann Economics, who cites such looming expenses as rising health-care costs, the state's education-reform program, and the prospect of decreased federal aid for the $10-billion-plus Big Dig.

The Weld tax cuts add up to the largest transfer of wealth in Massachusetts history. The losers: people of all income levels, but especially the middle- and working-class families who constitute the vast majority of the state's residents. The winners: corporations -- such as Raytheon and Fidelity -- which threatened to leave the state and were rewarded with multimillion-dollar tax breaks, and the tiny fraction of the population rich enough to benefit from massive cuts in taxes on inheritances and capital gains.

It's a situation that infuriates Dukakis, who accuses Weld of breaking faith with the voters who elected him in 1990.

"I personally think we had a rather strong obligation to repeal the tax hike at the earliest possible time, because that's what we said when we passed it," Dukakis says today. "The fact that we didn't repeal it while passing hundreds of millions of dollars in special-interest tax breaks is, I think, outrageous. How do you justify eliminating taxes on capital gains while in effect saying, `If you make your money by the sweat of your brow, we're going to tax you and tax you good'?"

Jim St. George is doing a major hand thing. The head of the Tax Equity Alliance for Massachusetts (TEAM) is gesturing as he tries to explain how shifts in the state tax structure have hurt the middle class. "Basically you push down here and they come up here," St. George says, moving his arms up and down to demonstrate. "You're paying what Raytheon used to pay and Fidelity used to pay and BankBoston used to pay. There are choices you make. Any tax cut you grant to a corporation is a tax cut you can't grant to middle-class families."

TEAM has put together a detailed analysis of the Weld-Cellucci tax cuts showing that, of the $994 million they will cost when fully implemented, $866 million, or 87 percent, are aimed at business and at "high-income taxpayers," that latter assertion based on the assumption -- supported by state data -- that cuts in the capital-gains and estate taxes overwhelmingly benefit the rich. TEAM's numbers are based on a study done by the nonpartisan Massachusetts Taxpayers Foundation.

Essentially, the Weld-Cellucci administration took care of its well-heeled supporters with three big giveaways:

  • Corporate tax breaks to companies that complained they were paying more than competitors in other states. In 1995, Raytheon and other manufacturers won $122 million a year using this argument, and the banking industry grabbed another $35 million. The following year, Fidelity Investments and other financial-service businesses were given $46 million. Total cost: $203 million per year. And now the insurance industry has waddled up to the trough, seeking two tax breaks worth an estimated $75 million per year.

  • A notorious 1994 deal in which the legislature's Democratic leadership went along with a steep cut in the capital-gains tax in return for Weld's approval of a pay raise for legislators. How sweet is it? Investors who hold onto an asset for at least five years no longer have to pay any capital-gains tax at all. And the stock-market boom has enriched these investors even more than the Weld-Cellucci administration's number-crunchers had originally projected. Total estimated cost per year, when fully implemented: $293 million, two-thirds of which, state revenue statistics suggest, will go to the 5 percent or so of taxpayers who earn at least $100,000 a year.

  • A six-fold increase in the estate-tax exemption so that heirs no longer have to pay tax on any inheritance of $600,000 or less, the same as the federal level. Advocates of this tax break argue that it gives rich elderly Massachusetts residents an incentive to drop dead here rather than in Florida or some other low-tax haven. Yet there are no statistics showing whether or not that's what happens. Total annual cost: $308 million.

  • A critic of TEAM's analysis might point out that St. George has excluded several tax cuts that have benefited middle- and working-class taxpayers. For instance, TEAM doesn't count the $242 million in one-time rebates paid out of the surplus during the past two years. Nor does it consider the expiration of a Dukakis-era income-tax surcharge that automatically died in 1992, or the 1991 repeal of Dukakis's sales tax on professional services, a measure so reviled that it was never even allowed to take effect. St. George, though, argues -- persuasively -- that Weld and Cellucci don't deserve credit for cutting taxes that were due to expire by statute or that were never collected in the first place. As for the one-time rebates, those actually help strengthen one of St. George's principal points: that the Weld-Cellucci approach has been to mollify ordinary voters with splashy, temporary payouts, while quietly rewarding corporations and rich supporters with tax breaks that drain more money from the public coffers with each succeeding year.

    Although Weld bears the main responsibility for instigating these special-interest tax breaks, the Democratic legislature shares the blame. Democratic political consultant Michael Goldman says Democrats were afraid that if they opposed any of Weld's tax cuts, they would be castigated as "Dukakoids in sheep's clothing." Jim Braude, St. George's predecessor as TEAM's executive director and an outspoken liberal, attributes Weld's success to his aura of invincibility. "Weld's election led to the complete collapse of the liberal infrastructure in this state," says Braude, who notes that during the 1990s even the Boston Globe's traditionally liberal editorial page veered rightward, especially on matters of state fiscal policy.

    Massachusetts Senate president Tom Birmingham (D-Chelsea), one of the legislature's few remaining liberal stalwarts, has a different explanation that might be summed up as: It seemed like a good idea at the time. As Birmingham sees it, legislators went along with a series of tax breaks that made sense as officials pondered ways to revive the state's economic fortunes and soften its antibusiness image. If legislators had been able to look at the big picture in 1991 -- if they had known they would be able to grant $1 billion in annual tax breaks over the next six years -- then Birmingham believes they never would have gone along with skewing those breaks so heavily toward corporations and the rich.

    "I don't know whether, in fairness, you can look at that as if it were a choice," says Birmingham, who's offering a $443-million-a-year tax-cut plan of his own that would favor low- and middle-income residents. Still, his plan falls considerably short of the repeal that was promised eight years ago: although Michael Dukakis, Pat McGovern, Barbara Anderson, and others say the tax hike was clearly meant to be temporary, Birmingham notes that the promise was never written into law.

    The tax-cut debate now under way is driven by the familiar and loathsome politics of division, by which leaders who seek further to enrich the wealthy turn the middle class against the poor. The master of this was Ronald Reagan, who inveighed against dole-addicted "young bucks" and fictional Cadillac-driving welfare mothers to justify budget cuts, then spent the money on tax breaks that mainly benefited the rich and on a military buildup that lined the pockets of defense contractors. (Remember those $300 toilet seats?)

    But Reagan's pupil Bill Weld did the Gipper one better. By taking a $1 billion tax increase paid mainly by the middle class and giving it to his rich friends, Weld made it impossible to repeal that increase without risking fiscal chaos and painful budget cuts. Meanwhile, middle-class voters haven't seen any money returned to them, so they assume there haven't been any tax cuts at all -- and start grousing about their money going to welfare mothers, drug addicts, and expensive special-education programs for kids who, goddamn it, just need a good whack upside the head. When a brave few try to speak out against the human suffering that is likely to result from a massive tax cut, they're portrayed as whiners and crybabies.

    For instance, people such as Cellucci campaign manager Rob Gray, a former Weld aide, say that similar predictions of social misery made when Weld was cutting the budget never came true. "I think that's the same type of statement that we were hearing in 1991 and 1992," he says. "It just didn't happen." Told of Michael Dukakis's belief that Weld's $1 billion in tax breaks should have been used to repeal the 1990 income-tax hike, Gray sneers: "Taking tax-policy advice from Governor Dukakis is like taking health-care advice from Dr. Kevorkian."

    But budgets are choices, and you can't choose everything. With $1 billion a year already hacked out of the revenue base and handed over mainly to those who need it least, it's simply not possible to keep faith with the taxpayers who bailed the state out of a crisis in 1990 without also cutting essential services.

    As it is, the state's fiscal psychology has been shaped by a billion-dollar annual drain that few people even know about -- which creates the danger that resentful middle-class taxpayers will turn a deaf ear to the genuine needs that are out there. MASSCAP, the Massachusetts Community Action Program Directors' Association, reports that even in the midst of the economic boom, 10.4 percent of the state's population lives in poverty. Sean Cahill, director of the Massachusetts Human Services Coalition, warns that Cellucci cannot balance his generally supportive social-service budget with his promise of a massive tax cut. Joseph Doolin, who runs Catholic Charities for the Archdiocese of Boston, worries about the impact of 38,000 welfare recipients' losing their benefits starting this November.

    Promises, promises

    The candidates' tax-cut proposals

    There are as many positions on repealing the 1990 income-tax hike as there are candidates running for governor.

    The Republicans

    Acting Governor Paul Cellucci supports the Citizens for Limited Taxation and Government (CLT&G) ballot initiative, which would cut the income tax from 5.95 percent to 5 percent over the course of three years, says campaign spokesman Rob Gray; he also supports a separate ballot measure to cut the tax on unearned income from 12 percent to 5 percent. Cellucci unapologetically defends his predecessor, Bill Weld, for cutting taxes by $1 billion and directing most of that relief to corporations and the wealthy. "Businesses and people make decisions about where they're going to locate," says Gray. "It has to do with the state's competitiveness."

    Like Cellucci, Treasurer Joe Malone supports the tax cuts on earned and unearned income. Unlike Cellucci, campaign spokesman Mike Armini says, Malone would have preferred that more of Weld's tax cuts go to "regular working people." He adds that Malone is confident the state can afford the income-tax cut because he's pledged to hold the growth in state spending to the rate of inflation.

    The Democrats

    Attorney General Scott Harshbarger has come out with the most complicated plan to date. It would reduce the income-tax rate from 5.95 percent to 5.25 percent and, to increase progressivity, double the personal exemption and exempt from taxes the first $1000 of interest and dividend income. The plan would also cut the tax on unearned income to 5.25 percent. Harshbarger would phase in his cuts over five years, a timetable that could be speeded up or slowed down depending on economic conditions. Campaign spokesman Dwight Robson acknowledges that Weld's $1 billion in tax cuts will make Harshbarger's plan more difficult to pull off, adding that Weld should have focused on "average middle- and lower-income families."

    Patricia McGovern was chairwoman of the Senate Ways and Means Committee when the income tax was raised in 1990; her plan to roll back that increase, says spokesman Stephen Bilafer, "is based on the promise she made during the fiscal crisis." Under her proposal, other taxes would remain untouched. Like Harshbarger, McGovern seeks to phase her plan in over five years, depending on economic conditions. "It has to be done in a way that protects the things we all care about, such as education, health care, and child care," says Bilafer. "There's the promise on the tax cut, but there's also other promises government makes to its people." As for the Weld-Cellucci tax cuts, Bilafer says that McGovern "would have taken care of working families first before giving tax breaks to the wealthiest."

    For former Boston mayor Ray Flynn, any decision on a tax cut would be made the way a family puts together its budget. "I would do it according to priorities -- moral priorities, social priorities. If it comes to a certain figure and there's money left over, the family makes a decision on how it's going to be spent," says Flynn. His priorities include health care for working-class families, housing assistance for low-income people, services for the mentally ill homeless, and help for families with special-needs children. He calls Weld's tax cuts "economically shortsighted and morally reprehensible," and says if he believed the state could afford tax relief he would target it to working-class families.

    Former congressman Brian Donnelly, who joined the race a few weeks ago, is still putting together his tax plan. But his proposal, which will total considerably less than the $1-billion-plus per year the other plans would cost, will likely consist of a reduction in the overall income-tax rate and an increase in the personal exemption. Donnelly would also use some of the surplus to boost capital spending. He declines to criticize Weld's $1 billion in tax cuts, saying tax relief for corporations and the wealthy was needed to make Massachusetts more competitive. "We can't necessarily, in my opinion, take ourselves off that playing field," Donnelly says.

    Then there are those needs often described as "investments," such as the $500 million in education-reform money the state still has to come up with, and the way-too-late-to-stop-now Big Dig project, which may require a staggering infusion of state funds if Congress, as many predict, cuts federal funds. Tripp Jones, executive director of the nonpartisan think tank MassINC, the Massachusetts Institute for a New Commonwealth, argues that economic growth is being held back because one in five adults cannot read or write at a fifth-grade level -- yet, in some urban areas, waiting lists for state-funded literacy programs can take two or three years.

    Ignorance, in this case, isn't bliss. Because few voters realize that their 1990 tax hike was handed over to the rich, it's pretty damned unlikely they're going to be persuaded to forgo a tax cut in favor of helping substance-abusing "gimme girls" or non-English-speaking immigrants. Middle-class taxpayers ought to demand that Raytheon and Fidelity and the speculators and the coupon-clippers give them back their money. It's far more likely that they'll vote themselves a tax cut, and make the poor and the sick and the young pay.

    Class warfare's a beautiful thing when you can watch it from the penthouse.

    Ray Flynn is sitting in an empty lounge at Anthony's Pier Four, wary and unsmiling. The media -- including this reporter -- haven't exactly been kind to the former Boston mayor since he wrapped up his ambassadorship to the Vatican last summer. But he's plowed ahead with a long-shot outsider's campaign for the governorship, making the rounds with an entourage of one: his son Eddie.

    It's a Monday evening, and he's just finished pressing the flesh at a scholarship event for the South Boston Sports Hall of Fame, of which Flynn -- a legendary basketball player at South Boston High School and at Providence College -- is a member. He'll put in an appearance in Quincy before the night is over. His is a campaign conducted below media radar, and Flynn complains that when reporters do call, all they want to talk about is how much money he's raised (answer: not much), who his political consultant is, and who's going to be doing his polling. "I think it's going to be a campaign of money versus message," says Flynn hopefully. Surely Flynn knows that not only is he short of money, but his message is out of vogue. He is a marginal figure now, as marginal, in his own way, as Michael Dukakis. Never mind that Flynn's message would have been solidly within the mainstream a dozen years ago.

    Indeed, it says something about the state of the Democratic Party that Flynn these days is considered some sort of woolly-headed throwback for pushing the same brand of working-class liberalism that once made him a popular three-term mayor. His basic economic themes -- that more funds should be directed toward such human needs as the mentally ill homeless, health care, special-needs children, and the low-income housing shortage; that any tax cut should be directed toward working-class families -- were once a staple of Democratic politics. And for the life of him, he can't understand why Weld was allowed to get away with showering his rich friends with $1 billion worth of tax cuts.

    "I'm very surprised that there isn't outrage about it," Flynn says. "I'm surprised that the media is really silent on this issue, and has really kind of lost its moral compass. Before, that would be called embezzlement. Now it's called being probusiness. You could almost give away the Golden Dome under the guise of being probusiness."

    Today's conventional wisdom is that the Ray Flynns of the world just don't get it; that tax cuts for corporations and the rich are smart politics and smart economics. David Tuerck, who heads the conservative Beacon Hill Institute, says repealing the income-tax hike would create 105,000 new jobs, so that gross revenue losses to the state would be just 5 percent. And Michael Widmer, president of the Massachusetts Taxpayers Association, defends Weld's tax breaks, arguing, "The business tax cuts have been focused on preserving and expanding the job base in the commonwealth, and I think it's unfair and misleading to say that those tax cuts are somehow for the wealthy and not for working people."

    But long-time students of the politics of tax-cutting may feel a queasy sense of déjà vu at these pronouncements. After all, Tuerck's supply-side notions drove the federal deficit to record levels during the Reagan years; it wasn't until George Bush and Bill Clinton raised taxes that the deficit came down. And Widmer is embracing trickle-down economics -- not to mention the bullying tactics of big corporations that threatened to pack up and leave if they didn't get what they wanted. Even Senate Taxation Committee chairman Warren Tolman (D-Watertown), who defends the Fidelity tax break, worries about what will happen if efforts to make the state more tax-friendly result in other states' lowering their taxes even further. "This is a slippery slope," says Tolman, who's running for lieutenant governor. "Pretty soon you could have no corporate income taxes."

    The truth is quite simple. Eight years ago taxpayers were asked to shoulder an additional $1.3 billion a year to help the state out of a terrible crisis. The move was supposed to be temporary. The money was supposed to be spent on essential services such as education, housing, welfare, and care of the mentally ill. And it was -- for a time. But when the crisis was over, Bill Weld, Paul Cellucci, and the legislature didn't give it back. Instead, they gave it to the rich and the well-connected.

    "The fact that they gave away a billion dollars to a lot of special interests means that you have to proceed pretty carefully," says Dukakis. "It's too bad. It shouldn't have happened, in my judgment."

    It's a lot worse than too bad. Because when politicians don't make good on their promises, it fuels the cynicism that voters already feel toward government. The political and budgetary chaos that would result from trying to fulfill that promise now would only deepen that cynicism.

    Let's hope this time voters can figure out who's to blame.

    Dan Kennedy can be reached at dkennedy[a]

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