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The Mass Media

The Mass Media

The Mass Media

Question 3 – Nothing Less Than Fiscal Insanity

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Think of all the places you couldn?t go on public transportation, if the sales tax is cut.

Would you like to pay lower taxes? Well, who would not? How about this question: would you like the state to reduce funding for public higher education, public safety, human services and local aid now and forever into the future? I doubt the majority would. Well, these are essentially the same question. It is the one being posed this year in ballot Question 3, whose backers seek to reduce the sales tax from the current rate of 6.25 percent to 3 percent.

If the majority of voters actually vote in favor of Question 3, it would force the Legislature to cut the sales tax rate – and with it $2.5 billion dollars in revenues. This would come on top of a $2 billion shortfall already projected for fiscal year 2012. The total impact of projected shortfalls and a reduction in sales tax rates would turn Massachusetts into a fiscal basket case, requiring drastic cuts in human and physical infrastructure. There is widespread agreement that spending on these things are investments that are key to economic stability and growth in the Commonwealth. All four candidates running for governor and the Greater Boston Chamber of Commerce oppose Question 3, and with good reason. It is a really bad idea for you personally and for us collectively.

The vast majority of state spending consists of support to local communities (for K-12 education as well as fire and police protection), health care, public safety, child and elder care, repair and maintenance of roads and highways, and public higher education – yes, your higher education. The state spends money on these things precisely because the private market fails to produce these things at all, or produces them only at prices unaffordable to most of us; yet we as a society very much need them. That is because these public goods provide important benefits not only to the individuals who use them but also to society as a whole; yet they can only be provided if we pay for them collectively.

Without each of these vital services, we as a state (and a nation) would be less productive, less economically competitive and certainly less well-off. Take the simple example of repairing potholes. When they are left unattended and you drive over them, it ruins your car. This is costly to you, makes you late for work/school, reduces your quality of life and may endanger public safety. Similarly, allowing public education to erode results in providing quality education only to those who can afford it and disinvestment in those who can’t. Unequal and poor education results in lower productivity overall and ultimately slower economic growth than we might have otherwise.

Supporters of Question 3 claim that lowering the sales tax rate will result in more jobs, because they claim you have additional money to spend which will result in more demand for goods and services and with it more jobs. This is just plain wrong. Cutting sales tax revenues will immediately result in fewer jobs and/or steep pay cuts of Massachusetts workers. Cutting $2.5 billion out of the budget will mean fewer teachers, social workers, police, firefighters and heath care providers. It is true that, instead of the government spending this money, you will; but the additional spending from your relatively small tax break will not create nearly the number of jobs lost, most especially if you buy goods made or services provided outside of the state – which most of do. As a result, cutting the sales tax rate will actually serve to make the impact of the recession more severe in Massachusetts and certainly slow down any recovery underway.

Crying wolf? No. States must balance their budgets, so they must reduce spending by as much as revenues fall. How much is $2.5 billion? It is about half of what the state spends on our public schools. It is 2.5 times as much as the Commonwealth currently spends on public higher education. It is half of what the state spends on all human services. This is a large chunk of change, and the only way to compensate for not having it has to include drastic cuts and/or tax hikes or charge increases (like tuition and fees) elsewhere.

Massachusetts Taxpayers Foundation, a non-partisan, business financed non-profit that specializes in analyzing Massachusetts state and local fiscal policies, recently published a report entitled “Heading Over a Cliff”. In it they estimate the impacts if Question 3 passes. The reduction in revenues already predicted without the sales tax rate cut, plus those that would occur with a reduction in the sales tax rate, would force the state to cut $4.5 billion in the next fiscal year. Because about half the budget is funneled into areas that by law must be funded (like debt service, a large portion of K-12 funding to localities) or if cut would so severely reduce federal funds that it would be foolish to cut them (e.g. Medicaid), the remaining half of state expenditures would have to be cut by 28.4 percent. This would mean cutting 28.4 percent of the budgets for higher education, public safety, human services and local aid. Massachusetts residents, especially all of us at UMass Boston, may see a few more nickels and dimes in some of our consumer purchases, but we will be paying a much, much higher price for the tax rate cut today and in the future.

In addition to the profound fiscal effects a cut in the sales tax rate would produce, there are wonkish policy reasons not to cut the sales tax as well. Massachusetts already relies more heavily on income and property taxes than it does on the sales tax. This measure would make that imbalance all the worse and put even more pressure on other revenue sources. Cities and towns would almost certainly seek to raise property taxes and local fees to make up for lost state aid. The state would eagerly look for other revenue sources. Massachusetts relies less on the sales tax than other revenues sources (and than other states with sales taxes do) in large part because we do not tax most things that people buy. Food, any item of clothing less than $175, electricity and prescription drugs are not taxed. More importantly, the state does not tax services – for example, labor involved in car repairs, movie admissions, college tuition, dry cleaning and legal fees. Services are a large and growing part of our consumption dollars. Indeed, from a “good tax” perspective we should be thinking about lowering the rate, but only if we also expand the base by including a select number of services.

So for self-serving reasons as well as for the larger good of the Commonwealth, I urge you to vote no on Question 3. A penny saved in this case is not a penny earned, but rather a penny disinvested in our future.

Randy Albelda is a professor of economics, and in the 1980s served as the Research Director of the Massachusetts State Tax Reform Commission.