From Governing’s
February 2003 issue
| Massachusetts Adequacy of revenue   Fairness to taxpayers Management of system |
M
assachusetts’ official nickname has always been the “Bay State,” but until relatively recently it bore a less flattering nickname to citizens in the rest of New England. They made fun of it as “Taxachusetts.”
The term was never entirely fair. Massachusetts’ tax rates have generally stayed in line with the rest of the country, and as a percentage of personal income, its residents’ tax burden ranks in the middle of the 50 states. Through much of the 1980s, its individual income tax rate was 5.75 percent. Then, at a moment of fiscal shortfall in 1990, the rate was hiked further, to 5.9 percent. That increase was billed as “temporary,” but it was sufficient to cement the state’s reputation as a haven for tax-crazed legislators. Extension of the sales tax to most services underscored the point.
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FAST FACTS
Gross state tax revenues (rank): $17.2 billion (10)
State tax revenues per capita (rank): $2,700 (5)
State tax revenues as % of personal income (rank): 7.1% (24)
State and local taxes as % of personal income (rank): 11.0% (26)
Standout characteristics: Third among states in dependence on personal income tax; enacted nation’s largest personal income tax increase in 2002, part of overall tax hike of more than 5 percent; state cigarette tax of $1.51 per pack also highest in the country.
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That same fall, Republican William F. Weld took over the governor’s office — the first Republican to hold it in 16 years — after campaigning on a platform to roll back tax rates. The new service taxes were repealed a day after they went into effect. And so began a decade of tax reduction in Massachusetts, promoted not only by Weld but also by his GOP successors, Paul Cellucci and Jane Swift. It was a relatively easy step to take; revenue was pouring in as the state’s technology- and financial services-based economy took off. With the success of the bull market, residents watched the value of their stock options multiply. By the end of the ’90s, the overall annual impact of the tax reductions was about $3.6 billion.
Ironically, despite dozens of tax cuts, citizens still felt overtaxed. They took their issue to the ballot box in 2000, and voted resoundingly to roll the income tax rate back to 5 percent over three years.
By April 2002, the state was in fiscal trouble again. Revenues for 2002 had fallen 15 percent, or $2.5 billion, from the previous year. A large part of the problem was the 75 percent drop in receipts from capital gains, dividends and stock-option income, but the tax reductions were at least as big a culprit. “2002 was worse than it needed to be simply because of the timing of the voter-approved reduction in the income tax rate,” says Cam Huff, of the Massachusetts Taxpayers Foundation. Analysis conducted by the foundation attributed $710 million of the $2.5 billion revenue loss to the various cuts.
And so, the pendulum swung back. Legislators approved $1.1 billion in tax increases, aimed primarily at personal income. They froze the rate rollback at 5.3 percent (it had been scheduled to hit 5 percent this past January), eliminated the deduction for charitable donations and cut the personal exemption by 25 percent. Regulations on long-term capital gains were changed to tax the gains as standard income. And, like many states, Massachusetts hiked its cigarette tax, by 75 cents, to $1.51 per pack. The state nearly emptied its $3 billion in reserve accounts and slashed almost $725 million in spending.
Even after these moves, the budget still wasn’t balanced. Acting Governor Swift took another $315 million out of the state spending plan midway through the year. Looming larger is the 2004 budget. In early December, incoming Finance Secretary Eric Kriss predicted a budget hole that would surpass $2 billion. Another tax increase of last year’s proportions is impossible: Voters sent a message about their distaste for one last November when they nearly enacted a referendum to eliminate the personal income tax altogether.
So what does Massachusetts do to get across the chasm this time? “We need to put everything on the table,” says Representative Brad Jones, the state House minority leader. “We may need to look at some of the sacred cows.” Perhaps the biggest bovine in the state has been its commitment to local aid, which is necessary because a ballot measure passed in the 1980s caps annual increases in the local property tax at 2.5 percent of aggregate value. This severely constrains local ability to raise funds in a state that also prohibits local-option sales or income taxes. The state had to step in, and it will be extremely hard to step back, particularly on funds for education.
On the positive side, the Revenue Department has a good reputation for its oversight of local property tax administration. Massachusetts also is looking to administrative efforts to help ferret out extra dollars. A tax amnesty program last fall was expected to generate about $42 million but resulted in a windfall of more than $100 million. The state has been a pioneer in its program that makes it a relatively simple matter to draw cash directly from bank accounts of tax debtors.
That’s one way the state has improved its efficiency. There’s more. Nearly one-third of personal income tax returns, for example, are now filed electronically.
But spending cuts last year threatened to erase some of the improvements. The Revenue Department’s budget was cut 13 percent in 2002. That left fewer people to process returns; last year, some taxpayers waited until August for their refund checks. The state normally has to pay interest on refunds that take more than 45 days to process, but in 2002, the legislature approved a 120-day window. Revenue Commissioner Alan LeBovidge has received the same extension from the legislature for 2003. The department should be aided, though, by a 3 percent budget increase this year, made possible by the success of the amnesty.
Copyright © 2003, Congressional Quarterly, Inc.