John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and is an adjunct professor of economics at Bentley University, recently urged readers to vote NO on Question 1 and NO on Question 2 in the upcoming state election. Today he tackles Question 3 concerning the proposed rollback of the state’s sales tax.
Question 3 on the November ballot asks voters to cut the sales tax from 6.25 percent to 3 percent. With one major improvement, that could actually be plausible. Until then, vote No on Question 3.
As usual, there is excessive emphasis on tax rates. The important question with taxes is not what the rate is. The problem is who pays.
In 2008, the “Small Government” forces tried to eliminate the income tax. I said at the time that if they really wanted to help low and middle-income families they should go after the sales tax.
Solving a budget crisis by increasing the regressive sales tax from 5 to 6.25 percent was not a good idea. However, lowering it back is not good enough for the people who put this question on the ballot. They claim 5 percent is too high even though that will put our sales tax rate below the national median.
Actually, the sales tax burden in Massachusetts is lowest among the 45 states that have a sales tax. That is because we wisely exempt food, and clothing up to $175, as necessities.
To perform a thorough analysis we must consider the full burden that Massachusetts taxpayers face. When you do, it is clear “Taxachusetts” is a myth.
Massachusetts ranks 31st for all state and local taxes measured relative to income. Taxes are lower in states like Wyoming or Louisiana, but incomes are much lower. The overall tax rate in 30 states is higher than ours, and most of those states provide fewer services.
Even candidates who claim to be fiscally conservative oppose question 3. Independent budget analysts agree that reducing the sales tax by over 50 percent will not involve trimming the fat. Rather it will be cutting to the bone, and beyond. Since low-income families lack the resources and safety net to absorb the cutbacks, the result will be very regressive.
Some voters will support question 3 because they are angry. They have some right to be. However, a few high profile cases of pension abuse and misdirected funds do not add up to enough to justify a drastic cut in revenue.
The proposed tax cut will reduce revenue by an estimated $2.5 billion. That is on top of the $2 billion budget deficit already projected for next year. The Small Government people have neither quantified the impact of the cuts, nor conducted an analysis of how much state and local governments can reduce spending without losing critical services.
Question 3 supporters claim rolling back the sales tax will create new jobs. The presumption is that people will take their 3.25 cents and spend it. The reality is we do not know how much extra they will spend, or whether they will spend it in Massachusetts.
We do know that many state residents will lose their jobs due to extensive budget cuts. That will mean lower spending. The result could be a net loss of jobs.
The answer is not smaller government. The goal must be better government.
Fortunately, we can achieve both goals. We can make our government better, improve the fairness of our tax system, and lower the sales tax to 3 percent.
One of the most glaring forms of government waste is tax breaks. Studies show they are ineffective at promoting economic growth. What they are effective at is making the Commonwealth’s tax system inequitable.
If you go out and purchase personal hygiene products you pay the sales tax. Go to get a manicure or pedicure and you do not.
Buying software to help you with your tax return is a taxable purchase. If you pay to have an accountant do it for you the transaction is tax free.
If you pay a lawyer to help you draw up your estate plan you do not have to pay a tax to have someone help you avoid taxes. If you cannot afford a lawyer and buy a book on writing wills you pay the sales tax.
Why should one form of business get preferential treatment? In most states, many services are subject to the same sales tax as goods. In 1990, the Massachusetts legislature enacted a sales tax on a small set of services. They later repealed most of them. You can still find one example of a service tax by looking at your phone bill.
Extending the sales tax to services made sense twenty years ago; it makes even more sense now. A tax on services is sometimes referred to as a 21st century tax because our economy is becoming more service oriented.
If we make the sales tax fairer, reducing it then makes sense. More businesses would have to pay the tax, but it would be at a lower rate.
To the extent possible, businesses will pass the tax on to consumers. However, a sales tax on services is much less regressive than taxing goods. Government gets better.
Until then, reducing the sales tax all the way to 3 percent is much too risky, in particular for those least able to take on risk. I would try to dissuade anyone from quitting their job or retiring without knowing whether they would have enough income to survive. The voters of Massachusetts should heed the same advice.
Vote No on Question 3.