MASSACHUSETTS FORUM
By Peter Enrich
Our local and state governments provide many of the vital public structures that build strong communities and ensure opportunity for us and our children such as schools, transportation, public safety, parks, and health and social services.
Yet, the tax structures that enable us to pay the price for a civilized society suffer from two severe flaws. First, state and local taxes are exceedingly volatile, dropping calamitously during economic downturns, when the revenues are most badly needed. State and local governments, unlike the federal government, can only spend what they take in.
Second, unlike the federal income tax, state and local taxes are regressive: households with lower incomes pay a higher share of their incomes for the support of state and local government than do their wealthier neighbors. This regressivity is largely due to heavy reliance on sales taxes; even with exemptions for groceries and other necessities, lower income households spend far more of their incomes on taxable items than do higher income families. A recent study showed that low-income Massachusetts households spent 5.4 percent of their incomes on sales taxes, compared to 1.2 percent for wealthy households.
While we depend on and demand the services of state and local governments, we resist the reforms that would provide a healthy tax system. So, we find the state cutting essential services and turning to gambling, sin taxes, and gimmicks to try to pay its bills.
Instead, there are three directions in which Massachusetts should look to improve our ability to pay fairly and adequately for the service we all need:
• Follow the federal example and rely more heavily on income taxes, especially income taxes designed to require those with greater means to contribute a greater share to the common good. Even here in Massachusetts, where the constitution forbids graduated rates, personal exemptions and differential rates on investment income can build substantial progressivity into an income tax system. And small rate increases can yield impressive new revenues.
• Broaden the scope of our sales taxes to reach, not only sales of goods, but also a wider range of sales of services, such as club memberships, entertainment, personal and property care, and professional services. Many states presently tax some services, but often only a handful. Massachusetts only taxes 18 of the 168 services identified by the Federation of Tax Administrators and is the only state taxing none of 40 household service categories identified by the Center on Budget and Policy Priorities. Extending the tax to more services reduces an irrational inconsistency in the current sales tax, dramatically increases the tax’s revenue yield at a time when a growing share of household spending is on services, and diminishes both the regressivity and the volatility of the sales tax.
• Increase the share of taxes that are collected from businesses, rather than families. By one measure, businesses paid half of all state and local taxes in the 1950s, but only a quarter by the 1990s, and probably substantially less than that at present. By ending some of the tax incentives that have been shown to be ineffective in guiding business location decisions, closing the loopholes that have encouraged increasingly sophisticated corporate tax “management,” and reversing some of the rate cuts granted to businesses during better times, the state could go a long way to providing needed revenues while restoring the historical balance between taxes on individuals and businesses.
Each of these steps will demand courage on the part of political leaders and education of citizens about the workings of the tax system. Most importantly, they will require a revived recognition by all of us that taxes are an investment in, not an obstacle to, our shared future prosperity.
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Enrich is a professor at Northeastern University School of Law, specializing in issues of state and local governance and finance, and a former general counsel to the state’s Executive Office for Administration and Finance under both Gov. Dukakis and Gov. Weld.
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Copyright (C) 2009 by the Massachusetts Forum. 11/09
By Peter Enrich
Our local and state governments provide many of the vital public structures that build strong communities and ensure opportunity for us and our children such as schools, transportation, public safety, parks, and health and social services.
Yet, the tax structures that enable us to pay the price for a civilized society suffer from two severe flaws. First, state and local taxes are exceedingly volatile, dropping calamitously during economic downturns, when the revenues are most badly needed. State and local governments, unlike the federal government, can only spend what they take in.
Second, unlike the federal income tax, state and local taxes are regressive: households with lower incomes pay a higher share of their incomes for the support of state and local government than do their wealthier neighbors. This regressivity is largely due to heavy reliance on sales taxes; even with exemptions for groceries and other necessities, lower income households spend far more of their incomes on taxable items than do higher income families. A recent study showed that low-income Massachusetts households spent 5.4 percent of their incomes on sales taxes, compared to 1.2 percent for wealthy households.
While we depend on and demand the services of state and local governments, we resist the reforms that would provide a healthy tax system. So, we find the state cutting essential services and turning to gambling, sin taxes, and gimmicks to try to pay its bills.
Instead, there are three directions in which Massachusetts should look to improve our ability to pay fairly and adequately for the service we all need:
• Follow the federal example and rely more heavily on income taxes, especially income taxes designed to require those with greater means to contribute a greater share to the common good. Even here in Massachusetts, where the constitution forbids graduated rates, personal exemptions and differential rates on investment income can build substantial progressivity into an income tax system. And small rate increases can yield impressive new revenues.
• Broaden the scope of our sales taxes to reach, not only sales of goods, but also a wider range of sales of services, such as club memberships, entertainment, personal and property care, and professional services. Many states presently tax some services, but often only a handful. Massachusetts only taxes 18 of the 168 services identified by the Federation of Tax Administrators and is the only state taxing none of 40 household service categories identified by the Center on Budget and Policy Priorities. Extending the tax to more services reduces an irrational inconsistency in the current sales tax, dramatically increases the tax’s revenue yield at a time when a growing share of household spending is on services, and diminishes both the regressivity and the volatility of the sales tax.
• Increase the share of taxes that are collected from businesses, rather than families. By one measure, businesses paid half of all state and local taxes in the 1950s, but only a quarter by the 1990s, and probably substantially less than that at present. By ending some of the tax incentives that have been shown to be ineffective in guiding business location decisions, closing the loopholes that have encouraged increasingly sophisticated corporate tax “management,” and reversing some of the rate cuts granted to businesses during better times, the state could go a long way to providing needed revenues while restoring the historical balance between taxes on individuals and businesses.
Each of these steps will demand courage on the part of political leaders and education of citizens about the workings of the tax system. Most importantly, they will require a revived recognition by all of us that taxes are an investment in, not an obstacle to, our shared future prosperity.
--------------------------------------------------------------------------------
Enrich is a professor at Northeastern University School of Law, specializing in issues of state and local governance and finance, and a former general counsel to the state’s Executive Office for Administration and Finance under both Gov. Dukakis and Gov. Weld.
--------------------------------------------------------------------------------
Copyright (C) 2009 by the Massachusetts Forum. 11/09
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