The great tax debate of 2009: facts and figures that help
From the Massachusetts Nurse Newsletter
July/August 2009 Edition
The deepening economic recession has contributed to a record shortfall in Massachusetts’ state revenues. Every month brings additional bad news on the revenue front. Data for the first 11 months of the fiscal year that just ended on June 30 show an 11.5 percent decline in state revenues from a year ago. Even with a recently approved increase in the state sales tax, drawing down the state’s rainy day fund, and the much-needed infusion of federal stimulus funds, Governor Patrick and the Massachusetts Legislature have had to slash funding for many of the public goods and services that we value and depend on to maintain our quality of life.
For these reasons, a much-needed public debate about specific tax proposals and the overall mix of local and state taxes in Massachusetts has begun. The Massachusetts tax system depends on several taxes for the generation of revenue. Let’s consider each of the major taxes:
Property Tax. The property tax accounts for 35 percent of total state and local taxes. It is a very stable tax, but is also considered very regressive. “Regressive” means that lower income people pay a larger percentage of their income for this tax, while higher income people pay a smaller percentage.
Sales Tax. The general sales tax, which applies to most items purchased in Massachusetts— exceptions include food, drugs, clothing, and most services—generates 13 percent of state and local tax revenue. The sale tax is also considered regressive, because it hits lower and moderate income people much harder than wealthy people. The sales tax has declined in adequacy over the long term as the untaxed service portion of the economy has grown and as Internet sales—also untaxed—have increased. The Legislature voted in June to increase the sales tax rate from 5 percent to 6.25 percent, starting Aug. 1. This will bring in between $600 and $900 million of new revenue each year.
Personal Income Tax. The income tax makes up 34 percent of total state and local taxes and has the capacity to raise significant money for public services, but is not the most stable of taxes. It grows rapidly in good economic times and declines in recessions. The personal income tax in Massachusetts has a flat 5.3 percent rate, but is still progressive in its application due to provisions that reduce income taxes on lower income people. Indeed, the income tax is considered to be very progressive, meaning that it is one of the most fair forms of taxation. The income tax rate has been cut significantly over the last decade.
Gas Tax. Gasoline is taxed at a flat rate of 23.5 cents per gallon in Massachusetts. This rate has not been increased in almost 20 years, and it is below the national average and considerably lower than the average in New England. If one takes inflation into account, the value of state gas tax revenue has fallen by one third, contributing to a serious underfunding of transportation infrastructure improvements. The gas tax is considered regressive, although many argue that the environmental benefits of the gas tax (the tax reduces gas consumption and associated environmental damage) make this tax fairer than it seems.
Corporate Income Tax. This tax is usually considered to be a very progressive tax (i.e., puts the greatest burden on the wealthy), but it has very significant stability problems, as corporate profits can fluctuate widely during an economic cycle. The corporate income tax makes up 6 percent of total state and local tax revenue, considerably lower than the percentage it made up 20 years ago.
Overall, the Massachusetts tax system is regressive. Lower and middle income people pay a larger share of their income in taxes than do higher income people. This is primarily due to the state’s reliance on the property tax and the sales tax. Furthermore—and as this recession has clearly demonstrated—the state’s overall tax system is inadequate to fund the public goods and services on which we depend.
There is nothing more regressive or harmful than budget cuts, so it is important to tell our state legislators that we support them when they take a politically difficult vote to raise taxes in order to avoid cuts in funding for services. However, it is also important for us to discuss which taxes we would prefer to raise (and, perhaps, which taxes we might even prefer to lower) and what mix of taxes should make up our overall state and local tax system.
Note: This article draws heavily from “Understanding Our Tax System: A Primer for Active Citizens,” which is available at the Web site of the Massachusetts Budget and Policy Center (www.massbudget.org). We encourage readers to visit its Web site and sign up to receive the center’s occasional budget and tax policy updates by e-mail.