“A New Local Option” by John Edward

John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column:

In this column, I will explain how the Commonwealth of Massachusetts can:

1. Reduce property taxes,
2. Increase funding for local educational initiatives,
3. Enhance flexibility for cities and towns, and
4. Improve tax fairness.

The idea builds on an already successful program introduced three years ago.

In 2009, the state legislature passed the Municipal Partnership Act. Included in the bill were provisions for local option taxes. The local options allowed under the law include:

– A 0.75 percent tax on meals purchased at restaurants, and
– Up to a 2.0 percent tax on hotel rooms.

In the same year, the legislature also removed the exemption from the sales tax for alcoholic beverages. Voters restored the exemption with a 2010 ballot initiative.

Applying a sales tax on liquor should be a local option. Legislators should give cities and towns the flexibility to impose up to the full 6.25 percent tax in 0.25 percent increments.

The primary focus of the revenue should be to reduce property taxes. Most cities and towns tax at close to the maximum levy allowed in order to balance their budget. Taxing alcohol would allow municipalities to provide property tax relief without foregoing valuable public services.

The City of Lowell adopted the room tax in 2009 and the meals tax in 2010. The local option taxes have resulted in roughly $2 million in revenue for the city so far.

I asked City Manager Bernie Lynch how Lowell uses local option revenue. His response:

The local option taxes have been an important tool for Lowell to help fill the gap in revenue caused by the State’s local aid cuts…. In our case we have targeted the revenue raised to support the cultural programs of the City and our marketing efforts. So effectively, the revenue raised from the sale of restaurant meals and hotel room nights goes back to City efforts to get more people into the City using these same businesses.

Meanwhile, the repeal of the sales tax exemption for alcohol is costing the state about $110 million in annual revenue. Repeal passed by a close margin. Many cities, towns, and even entire counties voted overwhelmingly to retain the sales tax on alcohol.

The state should give municipalities the option to make a local decision. For Lowell I estimate that applying the full 6.25 percent tax on alcohol would bring in about $1.5 million in annual revenue

There was no discernable drop in liquor store sales in Massachusetts when the sales tax was in force. However, border communities will be concerned about losing shoppers to other states. Towns will be concerned about losing business to other towns.

That is why the alcoholic beverage local option tax should be flexible. Cities and towns could set it anywhere between 0 and 6.25 percent in 0.25 percent increments.

The legislature could prescribe how municipalities could use the revenue. Here is one possible prescription:

1. The first 2.25 of any local option alcohol tax would have to be used to reduce property taxes,
2. The next 2.0 percent would be used for education without state mandates for specific programs, and
3. The final 2.0 percent, if applied, could be used to maintain current programs.

If shoppers know the sales tax will reduce their property taxes or be an investment in education, they are more likely to buy locally rather than go to New Hampshire. Massachusetts cities and towns will have more flexibility to respond the next time the state cuts local aid.

Do not believe the myth of tax-free New Hampshire. New Hampshire has a tax on alcohol; they just do not call it a tax. They call it profit and state-run liquor stores generate a lot of money for the state. If you purchase liquor in New Hampshire, you are paying for government programs in New Hampshire.

Do not believe the myth that applying a sales tax is unfair because there is already an excise tax on liquor. There are very good reasons why every state applies excise taxes to alcoholic beverages. Due to the sale and consumption of these products, the state must spend money on:

– Distribution, monitoring, and enforcement of liquor licenses,
– Law enforcement and traffic control due to driving under the influence,
– Alcoholism prevention, treatment and recovery programs, and
– Health care expenses due to over-drinking.

There is no good reason why retailers selling a product that is clearly not a necessity should get a sales tax exemption that other retailers do not get. Every other state that has a sales tax applies it to beer. All but one apply it to wine, all but two to distilled spirits.

Do not believe the myth that taxes cause prices to be too high. The license quota system is the real problem. Requiring a license makes perfect sense. Severely restricting licenses drives up prices and drives out retailers.

In Chelmsford, all seven liquor store licenses are active, but they have issued none of the seven beer and wine licenses allocated to the town. In 2010, Chelmsford denied a license to the latest applicant. They are limiting customer choice, driving up prices, hurting retailers by denying them a license, and protecting the existing liquor stores.

In Tyngsboro, Trader Joe’s is moving over the border into New Hampshire. It has nothing to do with taxes. It has everything to do with Trader Joe’s not being able to get a license to sell wine.

The liquor lobby would strongly oppose any new tax. They have proven to be very good at getting what they want:

– In 2006 they defeated a ballot question to allow grocery stores to sell beer and wine,
– In 2010, they successfully restored the sales tax exemption,
– In 2011, they persuaded the legislature to retain the current quota for liquor licenses,
– At the end of 2011, they convinced lawmakers to speedily pass a bill so that liquor stores would not have to be closed for a whole two days in a row.

The policies that the liquor lobby advocates are anti-competitive. Allowing towns to decide how much of a sales tax to apply to alcoholic beverages, if any, embraces competition.

Let the competition begin. Let local communities decide. Let cities and towns use taxing liquor as another local option to reduce property tax burdens and fund education.

Let your state legislators know if you think this is a good idea.

2 Responses to “A New Local Option” by John Edward

  1. Bill C says:

    John –

    Great Article. I agree with your premis 100%. I think the way to really have substantial change is to implement this policy much more broadly. Contrary to what you might think (because of my “not one more penny out of my pocket” stance), I do think that many of our state legislators are trying to do the right thing and really care. However, with Speaker of the House (or should I say King of the State) and the President of the Senate (or should I say Queen) holding all the power… this is really just a nit in the grand scheme of change… How about this.

    Net 0 change to tax.
    4.5 % to state
    1.75 % local…
    I’m ok with 6.25% out of my pocket with this model….

    Take the heroin ($$) away from the State Legislatures. Clearly define what the state will pay for and not pay for… Let towns/cities manage on their own…

    I’m not intimate enough with the budgets to know what the exact numbers are that make sense but here is the philosophy…

    1. Take State legislature out of the process of controling city/town budgets – keep it local
    2. Force city/town leaders (selectpeople, managers) to work collarboratively on things every town and city need (trash, re-cycle, healthcare, etc etc…)
    3. Bring the accountability closer to the voter… many more people engage in local politics more than state, federal etc.. I think more people would start to care again…

    I could go on forever.. but can you imagine the engagement and amount of creativity that would happen if all of a sudden the Town of Chelmsford had $200M of Taxes (oops.. I mean revenue) to divey up…. and yes, then we could provide “state aid” (vs the state providing local aid) and hold the state accountable to us for a change!!!!!!

    How about that model?

  2. John Edward says:

    First, I want to go on the record as strongly agreeing with the sentiment that too much
    power in the Commonwealth of Massachusetts resides in the hands of two positions.

    As for your formula, I am assuming you want to apply it not just to a local option tax
    on liquor but all tax revenue in general. You are suggesting a much more drastic change
    to the way we spend/distribute our tax dollars. Much like the trend of devolution that
    has the federal government giving more responsibility (and in most cases revenue) to the
    states, you want the state to devolve responsibility to local communities.

    A quick look at the 2013 budget (as passed by the legislature) shows that if you take
    just Chapter 70 (Education) funding and Local Aid that the state now sends 16% of its
    “Total Appropriation and Transfers” to cities and towns (source: massbudget.org).
    Of course, a lot of that money comes with mandates.

    Your formula (assuming it applied to all spending — which is not the same as all tax revenue)
    would put it at 28%.

    My questions would be, what functions of state government do you think would:
    a) be more efficiently spent by towns (with much lower economies of scale),
    b) qualify as spending where local leaders truly know best, and
    c) would total anywhere near the 4.2 billion of extra “local aid” your formula would
    distribute directly to municipalities?

    My numbers are terribly crude so I have no right to expect details/precision from you,
    but my three questions above represent my doubts about the efficacy of your approach.
    And I did not even get into the equity issues.

    I feel like we have made progress here. You have historically called for less government,
    I say no — we need better government. You now say we can get better government,
    with revenue neutrality, via more emphasis on local government. I am not dismissing
    the potential for improvements/efficiencies on the margins, I just do not see the
    numbers implied (or that I implied/derived) by your formula adding up.

    Finally, a reminder regarding concerns of the equity impact of your proposal. It is indeed
    supposed to be the *Common*wealth of Massachusetts.