Big ballot mistakes: Mass. rent control, tax cut proposals would backfire – The Boston Globe

Both are appealing. Who doesn’t favor more affordable rents or lower taxes?

But both are bad ideas even though they attempt to address real economic challenges posed by the state’s high cost of living. Like most simple answers to complex problems, they would only make matters worse.

The rent initiative, backed by labor unions, would discourage new construction, which is essential to keeping a lid on lease rates. It would also decrease property values, putting a strain on municipal budgets.

The tax cut, pushed by business groups, would take a large bite out of state revenues, forcing difficult decisions about which services to eliminate.

Here’s a quick primer.

What it would do: Filed by Homes For All Massachusetts, a coalition of housing groups, the initiative would peg allowable annual rent hikes to the rate of inflation (as measured by the Consumer Price Index), with a cap of 5 percent.

Landlords would be barred from raising rents after a tenant leaves. Owner-occupied buildings with four or fewer units would be exempt, as would new buildings during their first 10 years. Cities and towns couldn’t opt out.

The initiative would “protect tenants from big corporate investors who unreasonably increase rents, while allowing local landlords to earn a reasonable profit and enabling new construction to address housing shortages,” said Carolyn Chou, executive director of Homes for All Massachusetts.

Several big labor unions have endorsed the measure, including the SEIU Massachusetts State Council and the Massachusetts Teachers Association.

Why it won’t work: Backers designed the proposal to sidestep the obvious flaw of rent control: that it chills new construction. Hence the 10-year exemption for new buildings.

But most apartment projects in Massachusetts take years to finance, permit, and build. Developers calculate their payoff over several decades, and a rent cap waiting at the end of year 10 changes the math.

The deeper problem is high rents in Massachusetts are a supply problem. There are not enough apartments and rental homes.

Not only do rent caps discourage new construction, they may encourage landlords to convert rental units to condos or reduce their investment in existing properties.

Moreover, evidence shows rent control can have unintended consequences.

A working paper examining St. Paul, Minn.’s 2021 rent control ordinance, which was less severe than the Massachusetts proposal, found that property values fell 6 to 7 percent. The losses were driven largely by lower expected future rents being priced into valuations.

That kind of decline ripples through municipal budgets. Cities facing shrinking tax bases typically respond by raising rates, cutting services, or both.

“It would be catastrophic for the economy,” said Tamara Small, CEO of NAIOP Massachusetts, a commercial real estate trade group.

What it would do: Reduce the state levy on personal income to 4 percent from 5 percent, phased in over three years.

The initiative would put money into people’s hands and make sure the government is not growing faster than residents’ ability to fund growth, according to Jim Stergios, executive director of the Pioneer Institute, a business-supported think tank that filed the measure.

“This is about making Massachusetts a place where people want to stay,” he said. Pioneer estimates the tax cut would lead to the creation of as many as 48,000 jobs and spur economic growth that would offset the loss of tax revenue within a few years.

According to backers, which also include the Massachusetts High Tech Council and the Massachusetts Competitive Partnership, the net annual revenue impact during the three-year phase-in period would be about $680 million. Following full implementation, state revenue growth would increase as an economic boost from lower taxes kicked in.

Why it won’t work: Tax cuts can modestly boost growth as consumers and small businesses spend the extra money. According to a report by the Center for State Policy Analysis at Tufts University, the median household tax bill would shrink about $1,250 each year.

But the economic boost won’t fully recoup lost revenue. Claims that cuts “pay for themselves” are not supported by the weight of economic evidence.

According to the Tufts report, the tax cut would result in a much bigger hit to state revenues than estimated by the initiative’s supporters: $5.1 billion a year when fully in place, or about 10 percent of total state tax receipts. The state Department of Revenue issued a similar estimate.

“A cut of this size would more than offset the revenue gains from the millionaires tax and imperil efforts to balance the state budget and sustain core government programs moving forward,” the Tufts report said.

Massachusetts has a real cost-of-living problem, and voters aren’t wrong to demand action. But these ballot proposals offer short-term gratification without fixing the underlying problems.

Larry Edelman can be reached at larry.edelman@globe.com.