Beantown Economics: State of the Commonwealth: Part 3 – Tax Bonanza

Dillon Zhou

The tax season of 2009 has officially begun, but most citizens of the Commonwealth are not fretting over the usual anxieties that are traditionally associated with this time of the year. The reason for this is obvious. Governor Deval Patrick and the state government are currently exploring a variety of new taxes to levy from the citizenry in order to fill the $1.1 billon revenue shortfall within Massachusetts’ budget for FY ’09 and the anticipated continuation of this trend for FY ’10 – all of which are under review by the state Legislature on Beacon Hill. They include a tax for meals, hotel stays, gasoline, tires, alcohol, and everyday junk food.

Mr. Patrick and his team have proposed these taxes in order to fill specific gaps in the existing and forthcoming budget of FY ’09 and ’10. In the matter of the $128 million in local aid, there are two discretionary taxes being pushed by the Governor that would allow communities to furnish their revenue with a 2% meals tax and a 1% in the local hotel tax – which would bring in $150 million in revenue. Furthermore, this plan advocates the removal of the property tax exemption held by telecommunications companies – which has the potential of bringing in $50 million in yearly revenue for the commonwealth. This pitch was proposed two years ago, but wasn’t acted upon due to stiff resistance from restaurant trade groups, business associations, and telephone companies.

These interest groups are still firmly against any increases in taxes, which might hurt the industries they represent, especially in light of the current recession. The resentment and anger is evident among those being targeted by these taxes; in fact, some feel that they’re livelihood is being unfairly threatened. “Why single us out?” said Peter Christie, President of the Massachusetts Restaurant Association. “Don’t single out an industry that has been reeling at the moment. I don’t think the Patrick administration fully understands this, because they seem bent on taxing our hamburgers.”

The House and Senate lawmakers on Beacon Hill seem to share the Mr. Patrick’s views, as they appear to have softened their opposition to his proposal for resolving the cuts to local aid.

“Given the climate and what we’re up against, a lot of the political walls fall, and you have to start embracing solutions you might not have considered during better times,” said Senator Steven Panagiotakos (D-1st Middlesex), Chairman of the Senate Committee on Ways and Means. House Speaker Robert DeLeo (D-Winthrop) is also of the same opinion and expressed it during a press interview.

” I think it’s imperative that we take up giving the cities and towns some other tools to make up some of the lost revenue. We have to take a fresh look on all of these items, whether it’s the meals tax, whether it’s the telecom tax, whether it’s the hotel tax. Those have to be on the table front and center and relatively soon.”

Interestingly, many New Hampshirites are also being affected by the Commonwealth’s search for new sources of incomes – specifically, the 5% sales tax on tires purchased in New Hampshire by Bay State residents – since 2008. The reason for this tax is due to the fact that New Hampshire has been luring Commonwealth residents across state lines to enjoy tax-free shopping for many years; Beacon Hill is simply taking measures to close this loophole by striking back by demanding that the Town Fair Tire Centers charge a tax to customers from Massachusetts – on the basis that tires sold to Bay State customers were intended for use in Massachusetts and therefore subject to the state’s authority to tax regardless of state borders. If this is successful, the state could push for a sales tax from all retailers who sell products to Mass residents under similar circumstances, including Sears and Best Buy.

The tire chain has fired back by filing a lawsuit to stop this move by making a case before the Massachusetts Supreme Judicial Court; they argue that the Commonwealth is violating the US commerce clause, which assigns all interstate regulations to the U.S. Federal Government. Basically, this suit is saying that the state government in Boston doesn’t have the constitutional right to tax sales outside of Massachusetts – in spite of the fact that the tire chain has 25 stores in Massachusetts.

According to Fred Nicely, General Counsel of the Council on State Taxation, “This is a very unique case, which has very little precedence. Because there are huge ramifications for the entire retail community.” It has been noted that if this precedent is set, Massachusetts stands to gain millions in revenue from Bay State residents who shop out of state.

This series of events took place one week after Governor Patrick proposed taxing alcohol, candy, and soda in addition to his proposals on higher taxes for meals and hotel stays. Many Massachusetts residents are upset by these new taxes, especially the new 5% alcohol tax. Many have openly declared that they would simply drive over to New Hampshire to avoid paying this new tax. Many wish that they could continue to support local liquor stores, but they feel that they wouldn’t be able to do so with the new tax. The state has projected $90 million in revenue, but many observers are skeptical because they believe that this move will do more harm by driving customers to seek alternatives outside the state.

The interest group for the Massachusetts Package Store Association, which represents 700 liquor stores around the Commonwealth, plans on flexing its muscle with a letter-writing campaign from its clients to protest this new tax. Originally, liquor stores in Massachusetts were exempt from the 5% sales tax in order to give them a competitive edge against stores from New Hampshire, which don’t have to pay a sales tax at all. “Obviously this campaign will have an impact; it self-evident after the failed attempt with the tobacco tax,” said a source from the Massachusetts Package Store Association.

In retrospect, many of these taxes are just old ideas being resuscitated by the state government during a troubled time. After being a citizen of “Taxachusetts,” the average individual is not surprised by such proposals – though it doesn’t mean that there’s a warm reception in general. Finesse and extreme circumstances have made it possible for the Governor to push his new taxes forward with more confidence.