The Salem News
---- — As attention focuses on the merits of the administration’s $1.9 billion tax plan versus the Legislature’s more modest package, I am troubled by the dearth of discussion about Gov. Deval Patrick’s proposed major structural changes to the state tax code. I have been a CPA specializing in tax for nearly three decades, so while evaluating this proposal, my frame of reference goes well beyond my time in the Legislature. In the governor’s quest to raise nearly $2 billion in revenue while simultaneously restructuring the tax code, I fear we will be left with a tax code that is flat as a pancake and devoid of deductions that help those most in need.
Deductions and exemptions
The governor’s proposal eliminates a long list of deductions that families rely upon. Not only do these deductions lend a level of progressivity (in both the tax and political sense) to the tax code, but they also encourage people to do important things that improve the lives of so many in the commonwealth. Modest deductions for those who adopt children, become foster families, use day care in order to work, go to college and send children to college, have children under 12 — are all being eliminated. The list of 44 deductions is quite comprehensive and also includes lead paint removal, septic systems, commuters, renewable energy, many employer-provided benefits, scholarships and fellowships. In addition to incentivizing important activities, these deductions also provide a small measure of assistance to those who need it most. Why discard this long list of good ideas?
The personal residence deduction
As the beleaguered real estate market is showing signs of recovery, now is not the time to eliminate the partial exemption on the profit from the sale of personal residences that matches the federal exemption. Removing this deduction will hit retirees particularly hard, since gains in the real estate market tend to be with those who have held on to their houses for a very long time.
Increasing the income tax
The governor’s plan includes a 19 percent increase in the income tax rate. According to the National Conference of State Legislatures, we already have the third-highest income tax per capita in the nation. Increasing this tax a full percentage point would result in us eclipsing New York and Connecticut on our way to the country’s highest per capita income tax.
Doubling personal exemptions
The personal exemption for single, head of household and joint filers would double, raising it to $8,800, $13,600 and $17,600, respectively. This idea will cost the state well over a billion dollars. A reasonable case could be made to index this number to inflation, but doubling is extraordinary. It also creates a very regressive cliff from non-participation to full participation at a substantially higher tax rate. For some measure of relativity, the federal personal exemption for 2013 is $3,900, up $100 from 2012.
Rolling back the sales tax
Though sales taxes tend to be regressive, in Massachusetts, our sales tax is actually more progressive than most states because food, clothing and medicine are exempt. In terms of revenue raised as a percentage of personal income, our sales tax is currently ranked a low 42nd among the states. Since revenue targets are driving the governor’s proposal, if this rate is reduced, $1.4 billion in revenue will need to be made up elsewhere.
The Legislature’s more modest plan reforms the transportation system by moving employees off the capital budget over three years while providing forward funding to allow for a capital plan. This closes existing gaps while still allowing for substantial, long-term improvements in our infrastructure, such as a Green Line expansion and new cars on the Red and Orange lines. The governor’s plan, on the other hand, implements a major expansion of the transportation system, delivering many projects to districts all over the state without first addressing current unsound fiscal practices.
As you can see, many of these large, structural changes to the tax code leave the governor’s plan with a revenue deficit and nowhere to turn but the income tax to make up that loss and generate $1.9 billion more. The Legislature’s transportation plan, on the other hand, utilizes a moderate, dedicated revenue stream consisting of a 3-cent increase in the gas tax while indexing the future gas tax to inflation. Estimates are that the average driver will pay between $12 and $30 more per year. Compared to such a large increase in the income tax along with structural changes to flatten the tax, for the average taxpayer, the choice is clear.
Over and over, I hear from people that they are worried about paying their bills. To overburden people with taxes to pay for “new wants” beyond necessary “needs” would be poor leadership. Heeding signs of alarm from the state’s bond-rating agencies, the Legislature’s approach is sensitive to the economic needs of the middle class and small-business owners, rather than raising their taxes. This plan will not interrupt what is still a fragile economic recovery. It is moderate and provides a dedicated revenue stream without completely upending the tax code and increasing the income tax.
Democratic state Rep. Lori Ehrlich, a certified public accountant, represents Marblehead, Swampscott and part of Lynn.