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, contributed the following column.
In my last column, I discussed marginal thinking. Marginal analysis is a very useful decision-making tool. If you are trying to figure out where a road will take you, you need to know where you are.
In this column, I will apply marginal thinking to transportation funding. The Massachusetts legislature chose to increase three taxes. Did they choose wisely?
Legislators expect to raise $500 million per year in revenue to pay for improving the state’s transportation infrastructure. That is much less than Governor Patrick wanted but of course much more than those who do not want to pay one more penny in taxes.
How we pay for taxes and who pays are more important than how much we pay. The legislature chose to increase taxes on gas, cigarettes, and software services. Marginal analysis can help assess the roads chosen as to how we pay for transportation.
The gas tax is a natural. If you are buying gas, you are using the state’s roads and bridges. The gas tax follows the benefits received principle of taxation.
An opposing viewpoint is that gas prices are already very high. The argument is that consumers will cut back on spending on gas or something else.
Gas is currently selling at $3.73 a gallon for regular where I fill up. Since the beginning of the year, the price has ranged from a low of $3.45 to a high of $3.95.
The gas tax increase was only 3 cents. It is now 24 cents per gallon. At current prices, drivers would not even notice the increase if it were not brought to their attention. Even with the increase, the Massachusetts gas tax is in the middle of the pack among states. Three cents at current prices is not going to have a significant effect on driving behavior.
The legislation also indexes the gas tax for inflation. Recent candidate for the Republican nomination for U.S. Senate Dan Winslow suggested that this will “impose a permanent increase” that he considers “taxation without representation.”
The gas tax is an excise tax. Excise taxes are applied per unit. Our representatives have not increased the gas tax since 1991. Sales taxes are applied based on the price. As a result, sales taxes are automatically adjusted every time prices go up.
The legislation uses the consumer price index to adjust the gas tax, not the actual price of gas. The consumer price index has been rising by less than 2 percent per year. A small gradual increase will have very little impact on consumer behavior.
The cigarette tax is a very different story. The bill raised the excise tax on cigarettes by $1.00 to $3.51 per pack. Massachusetts now has the second highest cigarette tax. A pack of Marlboro sells for more than $10.00. The cigarette tax increase will alter behavior.
At current prices, an extra dollar will drive some smokers over the border. Others will start buying on-line or otherwise avoiding Massachusetts taxes.
Some smokers will choose to kick the habit, or at least cut back. Studies show that teenagers in particular are likely to do so. An extra dollar is a big bite out of their limited discretionary funds.
Having said all that, one motivation for the cigarette tax is that many will not change behavior. For those addicted to smoking, cigarettes are effectively a necessity. Demand for cigarettes is very inelastic. The price goes up and smokers still pay. The legislature increased the cigarette tax by one dollar in 2008. Revenue increased by $143 million. The estimate that the new tax will raise $144 million in revenue seems realistic.
The third tax component in the transportation bill is extending the state’s 6.25 percent sales tax to software services. The question here is — what were the legislators thinking.
First, as is true with cigarettes, software has nothing to do with transportation. Neither are benefits received taxes.
Second. No one is sure what will and will not be taxed. Estimates as to the potential revenue range from $160 million by the governor to $500 million by the Massachusetts Taxpayers Foundation. One thing businesses do not need right now is more uncertainty.
Most importantly, why tax software services in particular? It is not clear what impact the tax will have. That is a big chance to take given software is an extremely important industry to the Massachusetts economy. Why pick on one industry? Why not tax legal services, for example?
What were they thinking? The Governor and legislature were thinking this would be an easy way to generate a lot of revenue. The software industry offered little opposition.
Our elected representatives should assess where we are now and take a thoughtful approach to generating revenue and making the sales tax fairer. Lower the sales tax and apply it to goods and services. Lowering the sales tax would give the retail sector a real stimulus rather than the gimmick sales tax holiday this past weekend.
In 2014, we may have ballot referenda to vote on repealing some of the transportation revenue taxes, and to lower the sales tax back to 5 percent.
A better approach would be to conduct a comprehensive review of current tax policies, applying marginal analysis. We should focus on how we pay and who pays. We should choose the road that will take us to a tax structure in the Commonwealth that promotes the common wealth. That means a fairer, simpler, consistent, less intrusive, and sustainable tax structure.
The revenue options of the transportation bill did not choose that road. Nor will the referenda questions. On the margin, our representatives could have done worse. We deserve better.