My View
Our local and state governments provide many of the vital public structures that build strong communities and ensure opportunity for us and our children such as schools, transportation, public safety, parks, and health and social services. Yet the tax structures that enable us to pay for a civilized society suffer from two severe flaws.
First, state and local taxes are exceedingly volatile, dropping calamitously during economic downturns, when the revenues are most badly needed. Second, unlike the federal income tax, state and local taxes are regressive. Households with lower incomes pay a higher share of their earnings for the support of state and local government than do their wealthier neighbors.
This regressivity is largely due to heavy reliance on sales taxes; even with exemptions for groceries and other necessities, lower-income households spend far more of their earnings on taxable items than do higher-income families. A recent study showed that low-income Massachusetts households spent 5.4 percent of their incomes on sales taxes, compared to 1.2 percent for wealthy households.
While we depend on and demand the services of state and local government, we resist the reforms that would provide a healthy tax system. So we find the state cutting essential services and turning to gambling, sin taxes, and gimmicks to try to pay its bills.
There are three directions in which Massachusetts should look to improve its ability to pay for the services we all need:
Follow the federal example and rely more heavily on income taxes, especially income taxes designed to require those of greater means to contribute a greater share to the common good.
Though the Massachusetts Constitution forbids graduated rates, personal exemptions and differential rates on investment income can build substantial progressivity into our tax system. And small rate increases can yield impressive new revenues.
Broaden the scope of our sales taxes to reach, not only sales of goods, but also sales of services such as club memberships, entertainment, personal and property care, and professional services.
Many states presently tax some services, but often only a handful. Massachusetts taxes only 18 of the 168 services identified by the Federation of Tax Administrators and is the only state taxing none of 40 household service categories identified by the Center on Budget and Policy Priorities. Extending the sales tax to more services would dramatically increase its revenue yield and diminish both the regressivity and the volatility of the sales tax.
Increase the share of taxes that are collected from businesses, rather than families.
By one measure, businesses paid half of all state and local taxes in the 1950s, but only a quarter by the 1990s, and probably substantially less than that at present. By ending those tax incentives that have been shown to be ineffective in retaining or attracting businesses, closing loopholes, and ending rate cuts granted during better times, the state could go a long way to increasing revenues and restoring the balance between taxes on individuals and businesses.
Each of these steps will demand courage on the part of political leaders and will require a revived recognition by all of us that taxes are an investment in, not an obstacle to, our shared future prosperity.
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Peter Enrich is a professor at Northeastern University School of Law, specializing in issues of state and local governance and finance. He was general counsel to the state's Executive Office for Administration and Finance in the Dukakis and Weld administrations.
