Study: Killing Massachusetts' Income Tax Could Boost Borrowing Costs

Massachusetts' borrowing costs could increase by five to 10 basis points if credit rating agencies downgrade the commonwealth in response to a potential elimination of the state's income tax, according to a report released yesterday by the Greater Boston Chamber of Commerce.

Voters will decide on Nov. 4 whether to keep the 5.3% tax in place or cut it in half to 2.65% beginning Jan. 1, followed by an elimination of the tax on Jan. 1, 2010. If Question 1 passes, lawmakers would have the capability to draft new legislation to repeal the initiative, amend it in some way, or implement new or additional fees, such as tolls.

The state income tax accounts for 60% of Massachusetts' total tax revenue and 40% of its total spending. Proponents of ending that revenue stream say it would force the state to function more efficiently by cutting unnecessary and wasteful spending.

Findings of the study, called "Economic Impacts of Eliminating the Massachusetts State Income Tax" and prepared by Global Insight Inc., mirrored a previous report from the Massachusetts Taxpayers Foundation released Oct. 6. Both studies conclude that the state would need to scale back on capital spending to keep debt service costs at 8% of operating expenses, as current borrowing plans would boost that ratio to 12% if the state were to lose its income tax receipts without implementing alternative revenues.

In addition, both reports say that downgrades to the commonwealth's credit rating could occur if voters choose to end the income tax. On Oct. 3, Standard & Poor's announced that if voters approve the initiative, it would put the state on negative watch. Fitch Ratings and Standard & Poor's assign their AA rating to the commonwealth's roughly $29 billion of outstanding debt. Moody's Investors Service rates the state Aa2.

According to the Global Insight report, the state could be forced to pay five to 10 basis points more at market if its ratings were to drop by one notch to double-A minus, with each five-basis-point increase tagging on $10 million over the life of a $1 billion loan. Those costs could increase even more if the rating agencies applied more drastic downgrades.

"A two-category downgrade can increase costs by as much as 15 basis points," according to the report. "Each five-basis-point increase will add about $10 million in borrowing costs over the life of the loan for each $1 billion the state borrows. A downgrade to A-plus/A1 (where only California and Louisiana are currently rated) could raise borrowing costs by $30 million per $1 billion borrowed."

Two recent polls indicate that more voters prefer to retain the state income tax rather than ending the revenue stream. In an Oct. 15 poll conducted by SurveyUSA on behalf of WBZ-TV Boston, 44% of those polled said they would vote against Question 1 compared to 28% of voters asked who said they would support the elimination and another 28% who said they were uncertain.

After incorporating which direction the undecided voters were leaning, a total of 48% of those polled said they lean towards voting against Question 1, while 35% lean towards approving the initiative and another 17% remain undecided.

A Oct. 13 Rasmussen Reports poll indicates that 59% of those polled oppose Question 1 compared to 33% who approved eliminating the income tax and another 8% who are undecided.

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