A Tax Policy Decided 15 Years Ago Raised Questions for Unending Debate

Friday, July 31, 2015

We are just a few months away from the 15th anniversary of the historic November, 2000, election when Massachusetts voters approved a referendum calling for the reduction of the state income tax rate from 5.95% to 5%.

No doubt, most everyone who voted for the reduction believed it would happen quickly if the referendum was passed.  But that was not to be.  The legislature, fearing the devastating effects of an immediate .95% reduction on government programs and services and projects, exercised its prerogative to set the actual terms and schedule of the decrease. 

The result was a slow, incremental reduction linked to the overall performance of the Massachusetts economy.  After fiscal years when the economy was strong and state revenue reached a certain benchmark, the rate would be reduced by .05% on January 1 of the next calendar year.  That process has brought us to the present situation: an income tax rate of 5.15% and a required reduction to 5.1% on New Year's Day, 2016.

By most reliable estimates, the state has lost approximately $3 billion in total revenue during the 15 years that the rate has been slowly cut -- an average of $200 million per year in lost revenue.

There are many who believe that money was needed more by government than the taxpayers, or who, looking at the many unmet needs in this state, lament what might have been accomplished with those funds over the past decade-and-a-half.

For example, State Senator John Keenan of Quincy, said May 19 during a debate on the FY 16 budget that the legislature should  be focusing on the $3 billion "given up" since the income tax rate began its downward track.  Keenan pointed out, correctly, that, since 2008, every yearly increase in state revenue has been consumed by the growth in multitudinous health care costs borne by the Commonwealth, implying, I believe, that cutting income taxes in those years was short-sighted and antithetical to the long-term interests of the populace.

You can make a good case that Keenan and like-minded legislators are right, that the relatively small gains made  by average taxpayers through reductions in the income tax rate have been outweighed by the crimp in government's ability to address serious needs in the areas of transportation infrastructure, public safety, education, and early childhood interventions, to name just a handful of glaring priorities. 

If you conducted a good statewide poll to assess how the typical resident of Massachusetts feels about the lowering of income taxes, as initiated by the 2000 referendum, and the resultant "loss" of $3 billion in state revenue, my guess is a large majority of respondents would favor lower taxes and say they did not wish  our government had collected that $3 billion.

Most persons are cynics when it comes to the question of  government wisely managing the resources that we the citizens place at its disposal.  That cynicism has only deepened since the Great Recession hit in 2008.  Those not employed in government have experienced or witnessed their jobs and their particular businesses and industries drastically changing under the pressures emanating from post-Great Recession, world-wide economic upheavals.  They know that government services have not been similarly changed and re-made, and they think, Why should we give more money to a government stuck in the old ways of doing things?

Yet the unmet needs of our society -- our Commonwealth --  are huge and undeniable.  Take transportation infrastructure as one example.  It has been reliably determined that we would have to spend $16 billion to  bring our roads, highways, bridges and public transit systems up to snuff.  Poor transportation infrastructure is a dead weight on our economy; fixing it will unleash growth, create jobs, and increase revenue to state and local governments.

Herein lies the greatest challenge to the Governor Baker administration.  First, to make our government run more effectively with the revenue it currently collects.  Second, to persuade the citizens of Massachusetts to support new revenue sources for modernizing  infrastructure, improving public education, and protecting children and optimizing the potential of children, particularly in their earliest, most vulnerable years.

I have no reason to believe that Charlie Baker is contemplating new revenue sources.  The evidence actually points in the opposite direction.  But I believe he will eventually come to the realization new revenue is needed, and that he will advocate for new revenue by proposing that any new revenue be sequestered, that is, used only for a certain defined purpose or a set of clearly identified projects and initiatives, and, further, that he will propose an independent oversight body to certify that new revenue is being used only for defined and agreed-upon purposes, projects and initiatives.

For starters, I'd be willing to pay my share of an annual $200 million increase in state income taxes if it could be certified that that money would be used exclusively to fix and improve transportation infrastructure.  Would you?




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