Pros and Cons of Ending “Taxachusetts”

For years, Massachusetts residents have referred to their state as “Taxachusetts.” But a November ballot initiative that seeks to abolish the state income tax could render the nickname a thing of the past.

Question 1 would eliminate the state’s current 5.3 percent income tax. The proposed law would reduce the tax rate to 2.65 percent for the tax year beginning on January 1, 2009, and would eliminate the tax beginning on or after January 1, 2010. Supporters say passage of the initiative would mean an extra $3,600 a year on average for Massachusetts workers, opponents point out that the measure would slash nearly 40 percent of the state’s annual $28 billion budget.

So is an income tax–free Massachusetts a good idea? Is it economically viable? BU Today asked Kevin Lang, a College of Arts and Sciences professor of economics and chair of the economics department.

BU Today: Why do people want to abolish the state income tax?
Lang: Supporters of Question 1 believe one or more of three things. Some believe that Massachusetts spends too much on public services. In the same way that each of us has to decide how much to spend on, say, food or entertainment, as a society, we have to decide how much to spend on the goods that are provided by government and how much to leave to people to spend on themselves. If you think that Massachusetts and its municipalities are providing too many services, then cutting taxes is a good way to stop that.

Other people want the goods and services, but believe that services won’t go down if we cut taxes. They believe, or at least hope, that there is a lot of government waste and that if the government has a lot less money, it will cut a lot of this waste rather than cut services.

Finally, some people want the goods and services, but want to pay for them in a different way. They feel that people who use services should pay for them. They want more fees, such as Turnpike tolls and charges for school activities. Others feel that local communities should pay for their own goods and services and so would like to replace some or all of the income tax with property tax increases.

What are some of the arguments against it?
The arguments against Question 1 are the mirror image of those for it. If you want to support current levels of services or something close to them, then you need to maintain revenues at more or less their current level. It costs money to provide schools, police protection, public hospitals, and roads.

Cutting taxes will not cut waste, but it will cut services. And the income tax is generally a fairer way to pay for services than are the other options. If the state income tax is eliminated, the state will cut aid to communities. In order to limit cuts to vital public services such as schools and public safety, communities will have to raise property taxes. Most communities will not be able to offset the entire loss in state aid just by raising property taxes. So they will cut services and increase fees. Some children will not be able to participate in sports, because their parents cannot afford the athletic fees. And the state will also raise fees. It will cost more to drive on the Mass Turnpike and probably some other major highways. This is much more unfair than having an income tax, because it charges people who happen to drive more on particular routes.

Can the state function if the income tax is eliminated?
The personal income tax raises about 40 percent of Massachusetts state revenues. It is inconceivable that the state could reduce spending by 40 percent without devastating cuts. And if we did cut 40 percent of spending, the budget still would not balance because some revenues (mostly from the federal government) are matching funds that depend on how much we spend in particular areas.

The real question is how much the state would make up for in lost income tax revenues by raising other taxes and how much it would cut to offset the lost income. In very rough terms, doubling the sales tax and eliminating exemptions would raise enough revenues to offset about half of what we would lose by abolishing the state income tax. Eliminating all state aid to communities would raise the other half. Of course, eliminating local aid would simply pass the bill onto local governments. They would have to raise property taxes and fees and cut services.

Collectively, communities could make up for the lost state aid by raising property taxes by 50 percent. The problem is that some communities are very dependent on state aid, while others are not. So some could raise property taxes just a little to offset the lost state aid, while others could not make up the difference even with a very large property tax increase. So in the end, you would probably need a system to redistribute property tax revenues from rich to poor communities.

How would passage of Question 1 affect Massachusetts residents?
My guess is that we will see a significant increase in the sales tax, a big reduction in state aid to communities, big cuts in services, and some cuts in fringe benefits for government workers. We will also see some attempts to solve problems in ways that are very damaging in the long run, such as underfunding public pensions and reserve funds.

Still this would not be enough to balance city and town budgets. So we would see mass layoffs of teachers and other local public employees. Remember that only about half the cut occurs in 2009, and the Legislature could decide to phase in the elimination of the income tax more slowly. If Question 1 barely passes, I expect that there will be a move to restore the state income tax by the November 2010 election.

The increases in the state sales tax will hurt small businesses, especially along the New Hampshire border, which will lose business to neighboring states and to the Internet. Property tax increases will hurt homeowners, landlords, and other property owners. I expect that after great disruption, the income tax would be restored, although probably at a lower level than currently, and that sales taxes and property taxes would be permanently higher.

If Question 1 passes overwhelmingly, many of the same things will happen, but there will be no serious attempt to repeal it. In that case, there are a lot of options that will be explored. I think there is a good chance that we would end up with a statewide property tax.

Who will be affected the most?
The biggest negative impact will be on public sector workers. The social service sector will be cut dramatically, and that will hurt people in need of psychiatric services, for example. But there will also be cuts in education, public safety, and other services. I would not be surprised to see Massachusetts give up on universal health care. At least initially, there will be sharp reductions in capital investments. The state and communities will also cut back sharply on maintenance and new construction projects.

The biggest positive impact will be on those who have very high incomes, especially those who at the same time do not own a lot of property. Wealthy communities will probably be able to minimize cuts. They are not as dependent on state aid and would not have to raise property taxes as much to avoid cuts in services.

Poor people would be hit particularly hard, because of the loss of social services and the increase in the sales tax and also because they disproportionately live in communities that would suffer big cuts in services.

A similar attempt was made several years ago. What happened?
In 2002, there was a ballot initiative that did not get a lot of attention before the election. In the end, it received 45 percent of the vote, which explains why both sides are taking it a lot more seriously in this election.

Do you think the initiative will pass? Why or why not?
On the one hand, there has been a more effective campaign against the initiative this time than there was in 2002. On the other hand, in tough economic times people often become more antitax. I don’t know which effect will dominate. My best guess is that it will be defeated by about the same margin as six years ago or a little more, but there is enough of a margin of error on that prediction that I do not rule out a yes majority.

How will you vote, and why?
Massachusetts revenues are already below what was projected when the current budget was adopted. As a result, the governor has been forced to enact significant budget cuts. Most of these are in health and programs that serve the needy. These cuts are modest relative to what we would experience next year if Question 1 passes. The immediate impact on our schools, hospitals, public safety, and other services would be devastating.

I serve as an elected member of the Brookline School Committee, and I know the children in our system will suffer greatly if Question 1 passes. And yet Brookline is much better situated than most communities to respond to the loss in state aid. State aid accounts for a relatively small part of our budget, and I believe that the voters of Brookline would raise their property taxes, albeit reluctantly, to offset the losses. Other communities would be hurt far more.

In the long run, the tax system can be modified to replace income taxes with property and sales taxes and fees. While I am open to arguments that Massachusetts should change the degree to which it relies on each of these, a sensible system will rely to some extent on all of them. Therefore, I will be voting no.

Vicky Waltz can be reached at vwaltz@bu.edu.