Robert David Sullivan 2

Bay State leans on income taxes, not so much on sales levies

Massachusetts ranks third in its reliance on income taxes to fund state and local government, behind Oregon and Maryland, according to a new report by the Tax Foundation. And despite all the uproar over this year's increase in the sales tax to 6.25 percent, our government don't depend on retail receipts as much as most states do.

The Bay State gets 36 percent of its state and local tax revenue from individual income taxes (compared with a national average of 23 percent), 34 percent from property taxes (vs. a national average of 30 percent), and 13 percent from "general" sales taxes (vs. 24 percent nationally).

In addition, the Bay State gets 7 percent of revenue each from "selective" sales taxes and corporate income taxes (vs. 11 percent and 5 percent nationally) and 4 percent from license and other fees (vs. 8 percent nationally).

Massachusetts is the only New England state not in the Top 10 most reliant on property taxes; in New Hampshire, which has no sales or general income tax, a staggering 61 percent of revenue comes from property levies.

There's a general North/South split in tax preferences, with Northern states tending to rely on income taxes for revenue while Southern states get more money from sales taxes. 

Mass. is Tax Foundation's 15th least favorite state

The DC-based Tax Foundation came out with its annual State Business Tax Climate Index today, ranking Massachusetts 36th in business friendliness (down from 32nd last year). That's still better than most Northeastern states. New Jersey was at the bottom, followed by New York and California. South Dakota was judged to be the best state to set up shop (if tax burden is your only concern), followed by Wyoming and Alaska.

The Bay State ranked highly on individual income taxes (14th least onerous) and was average on sales taxes (26th least burdensome), but lost points on corporate taxes (47th), unemployment insurance taxes (49th), and property taxes (45th).

An escalation in the debate over a graduated income tax

Blue Mass Group's David suggested last summer that it's time to consider, once again, a graduated income tax in Massachusetts. He pointed out that 34 of the other 40 states with income taxes have a graduated system, and suggested that a higher tax rate on the wealthy is a relatively fair way to raise revenue for the state. (Since it could take several years to amend the state Constitution in order to allow a graduated system, David has more recently argued for an increase in the current income tax as a more progressive alternative to a sales tax hike.) 

Today the Pioneer Institute's Jim Stergios argues that higher tax brackets for the rich is unfair and, worse, counterproductive:

Singling them out will do little else but convince them to change residency, leaving the middle-class has had to pick up the tab. So much for soaking the rich.

Stergios cites a Wall Street Journal editorial on what happened after Maryland boosted its top income tax rate last year:

One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing.

But the Washington Post's John Wagner wrote earlier this month that things in Maryland may not be as simple as the Journal suggests:

Boston's reliance on property tax may be a saving grace

A new report looks at the budget crises facing 13 American cities, including Boston. Tough Decisions and Limited Options: How Philadelphia and Other Cities are Balancing Budgets in a Time of Recession was released yesterday by the Pew Charitable Trusts.

Boston is actually among the better-off cities. The authors estimate a current budget gap of $140 million, equal to 6 percent of the city's general fund. Compare that to Detroit, which has a $300 million shortfall equal to 20 percent of its general fund.

As the chart below shows (click it for a sharper image), Boston relies heavily on property tax revenue, which is relatively stable. By comparison, Phoenix is dependent on sales tax revenue and state aid, both of which are in serious decline. That city has an estimated deficit of $201 million, or 17 percent of its general fund. Philadelphia's dependence on a wage tax has also put it in a bigger hole than Boston's.

Grist for a higher meals tax?

It's axiomatic that people eat out less often during a recession, but restaurant meals may not be such a bad value in Boston. According to the latest Consumer Price Index, the cost of "food at home" increased at almost twice the rate as "food away from home" in the Boston area from March 2007 to March 2008 -- even as the two categories showed almost identical cost increases nationally.

In metro Boston, household groceries went up by 6.0 percent (versus 4.3 percent nationally), while restaurant and take-out meals went up by only 3.5 percent (versus 4.6 percent nationally). The overall Consumer Price Index dropped by 0.4 percent during the same period, both nationally and in Boston, thanks to declines in transportation and energy costs.

There has been a moderation of menu prices lately in Boston -- or is it more accurate to say there's a sense of desperation brought on by a glut of high-end eateries? ("Restaurant Week," like the Christmas season, seems to be getting longer every year.) Whatever the reason, does it mean that there's some breathing room for a hike in the meals tax, as Gov. Patrick is proposing? Restaurant owners, not surprisingly, say no.

TIF makes no dif to Chelmsford's budget woes

Thanks to the recession, cities and towns can no longer count on attracting employers with tax breaks. The Chelmsford Independent reports on the nasty surprise that confronted budget writers in that town last week, when L1 Identity Solutions said, "On second thought, no thanks":

Earlier this fall, Town Meeting representatives approved a Tax Increment Financing (TIF) agreement to attract the Internet security company [L1 Identity Solutions] to 250 Apollo Drive. The deal would have exempt L1 from paying some taxes on $6 million in planned building improvements.

Chelmsford would have received $298,000 in taxes and building permit fees from the company over the five-year duration of the agreement. The town would have been entitled to even more yearly tax revenue after the agreement expired in 2015.

But L1’s stock price plunged this fall, declining from $17.22 a share on Sept. 19, to $5.84 a share on Monday. As a result, the company could not raise the capital to pay for moving and construction.

Chelmsford officials are also reeling from Speaker Sal DiMasi's prediction of cuts to local aid from Beacon Hill next year. These days, if municipal governments in Massachusetts didn't have such bad luck, they wouldn't have any luck at all. 

The Bay State's dangerous dependence on the capital gains tax

Plenty of Massachusetts residents have been hurting because of the stock market meltdown (ask everyone in your office to check their 401(k)s at the same time, and the cries of anguish will be heard on the next block), but the state itself may be in the biggest trouble.

The latest MassINC policy brief, "Capital Gains: Avoiding Harm to the State Budget," details how much state government relies on the capital gains tax (which applies to profits realized by selling stocks, as well as real estate and other capital assets):

Despite the known volatility of capital gains, the Commonwealth’s dependence on them has grown markedly since the beginning of the decade. At the same time, however, our preparedness for managing that volatility has declined. In 1999, Massachusetts was already one of the states most dependent on capital gains revenues, ranking 7th in the nation in the relative importance of capital gains for its state budget. By 2006, the importance of capital gains had grown. Massachusetts is now third most at risk among the 50 states if capital gains income declines. [Only Oregon and Connecticut are higher. - Ed.]

Older cars hurting municipal revenues

The soft market for automobiles is hurting state treasuries, as I noted earlier this week, but municipal governments are also feeling the pinch. The Patriot Ledger reported in May that local revenue from excise taxes is plunging as residents put off buying new cars:

In Weymouth, motor vehicle excise tax collections are lagging far behind what they were just a year ago.

“We haven’t seen this type of dramatic drop since the early '90s,” said James Wilson, Weymouth’s chief financial officer.

As of May 1, the town had collected $4 million, down from $5.3 million at this point last year and $5.9 million in 2006...

Keep your old car and starve your state's treasury

Another thing for state governments to worry about: people not buying cars. According to the Los Angeles Times:

As the U.S. auto market marches toward its worst year in decades and dealers close in droves, state and local governments across the country are preparing for serious belt-tightening.

Sales of new and used cars, as well as parts and service, are the single largest source of sales tax revenue for almost every state, county and local government, ahead of gasoline sales, restaurants and department stores. (Alaska, Delaware, New Hampshire, Oregon and Montana do not collect sales tax.)

The most recent collection report from the Massachusetts Department of Revenue shows that the state has taken in $178 million in auto sales taxes so far this year (actually, as of Nov. 8). That's a shortfall of $23 million (or 11.4 percent) compared with the same period last year.

Paul Krugman half agrees with the Massachusetts Republican Party

Well, the liberal New York Times columnist agrees with national and state Republicans that, in an ideal world, states would not raise taxes in an economic downturn. But I don't think he'd be on board with the Mass. GOP's current "Stop the Spending" campaign. From Krugman's blog:

...state and local governments operate under fiscal rules that lead to booming spending and tax cuts when the economy is strong and the reverse when the economy is weak. This is bad governance: services are cut precisely when people need them most. It’s also bad macroeconomics: it exacerbates the business cycle.

Right now, we’re seeing a sharp drop in state revenues, which is going to lead to big cutbacks in spending and tax increases at exactly the wrong time.

But never mind about that. Today's Boston Herald takes on the big story of how much it's going to cost to fill up President Obama's new car -- and the parallels to Gov. Patrick's infamous Cadillac.

The last word in Dave Wedge's story goes to Massachusetts GOP spokesman Barney Keller, who seems to be sticking to a belief in fiscal austerity at both the state and federal levels :

If President Obama is going to copy Governor Patrick’s words and his Cadillac, we assume next he’ll copy Governor Patrick’s tax hikes and reckless spending proposals.