Now that the so-called “tech tax” has been repealed by Gov. Deval Patrick, the source of the new funds necessary to replace this $161 million of revenue that would have been generated by this tax remains unclear.
Make no mistake, the funding of critical transportation infrastructure repairs and replacements are key to the future economic growth for the Massachusetts business community, and while the “tech tax” was appropriately criticized for both being difficult to administer, as well as for targeting an industry that is a key component of the growth engine for the Massachusetts economy, the need to find replacement revenue must remain a top priority for the Legislature and the governor.
Taxes that target specific industries, even those not related to the innovation economy, are more likely to adversely distort economic behavior through known or unforeseen mechanisms. Narrowly defined taxes or tax breaks aimed at certain industries is the equivalent of the state picking winners and losers — which is not necessarily the best economic development or tax policy. Instead, increasing broad-based taxes like the income tax is preferable. The reality is broad-based taxes are easier for voters to understand and judge and for businesses to plan around. Moreover, they impact all industries evenly without favoritism.
A fair criticism of some state-based, broad taxes is that they are regressive, particularly a flat income or sales tax, which takes a greater percentage of the disposable income of the poor than of the wealthy and, thus, fails the test of equity or fairness. These taxes, however, can be made more progressive by deducting essential purchases such as healthy foods or clothing, by deducting the first layer of income earned, or by raising standard deductions.
In addition to supporting consideration of broad taxes, we should also consider getting rid of targeted tax deductions that benefit certain economic activity without any good sense or expectation of payback. The current state tax code includes more than $926 million annually in such credits, according to the Mass Budget and Policy Center, almost triple the amount in 1996. Two examples that jump off the page of tax exceptions without a good payback to the citizens are the exception of soda from the sales tax and the tax credits for the film industry, each costing the state tens of millions of dollars per year without any constructive policy or investment payback. Alternatively, rather than targeting two specific tax breaks, perhaps all industry tax breaks could be reduced by a flat amount — say, 10 or 20 percent — resulting in enough funds to pay for needed transportation infrastructure and improvements for childhood education.