Massachusetts Cuts—and Complicates—Taxes

By David R. Henderson, Hoover Institution at Stanford University.

Even Massachusetts has got into the tax reduction act, albeit in a complicated way.
 
Earlier this month, Massachusetts Democratic governor Maura Healey touted the tax cuts she signed into law, stating in a press release: “$1 billion in tax cuts includes savings for seniors, businesses, renters, and the most generous Child and Family Tax Credit in the country.”
 
Not all tax cuts of $1 billion are equal. Because I’m an economist who realizes that incentives are important, I think the best tax cuts are those that reduce a marginal tax rate or increase a threshold beyond which a tax rate applies. Both kinds of tax cuts increase the incentive to make money or save money.
 
By that standard, there are two particularly good components in Massachusetts’ complicated tax-cut law. First, it cuts the tax rate on short-term capital gains from a whopping 12 percent to a less-whopping but still high 8.5 percent. Second, it reduces the death tax, increasing the threshold beyond which the estate tax applies from $1 million to $2 million. Both measures will give an increased incentive to save and invest and will also marginally raise the chance that relatively wealthy people will stay in Massachusetts.
 
There’s one other tax cut that’s pretty good: the lower tax rates “on a broadened class of beverages.” That reduces the “tax wedge” between what buyers pay and what sellers receive, which reduces the deadweight loss from the tax.
 
The rest of the tax cuts are good but not as good. They’re good because they really do cut taxes. They’re not as good because to get the tax cut, you must be in a particular category.

One example, which the governor highlights, is the Child and Family Tax Credit. Until now, you could get a tax credit for no more than two dependents, and it was $180 per dependent child, disabled adult, or senior. The tax cut measure eliminates the “two-dependent cap” and raises the credit to $310 in 2023 and $440 in 2024 and beyond.

It’s understandable that the government would want to increase a tax credit for people who are disabled, assuming that the “disabled” category is well-defined. It’s much less justifiable to use the tax code to discriminate against the childless and the young.
 
I give the governor a C+ or maybe a B-. If you think that’s too generous, remember that I live in California. Here, a Democratic governor and a heavily Democratic legislature are still busy raising taxes.

Today's TaxByte was written by David R. Henderson, a research fellow with the Hoover Institution at Stanford University.