Is that a hint of red seeping into the blue tint of Massachusetts’ image as a progressive state?
Recent tax policies — raising the state’s sales tax to 6.25 percent, extending it to software services, and increasing state gas tax by 3 cents a gallon this year — appear to be giving Massachusetts a slightly different political shade these days.
Regularly criticized as a tax that falls disproportionately on the poor, the sales tax has nevertheless become an increasingly important tool to raise revenues for the state, experts agree. The same thing is happening across the country: When the going gets tough, such as during the recent recession, states are turning to the sales tax to boost revenues.
“It’s become the go-to tax,” said Robert Tannenwald, an adjunct lecturer in public finance at Brandeis University’s Heller School and former director of the New England Public Policy Center at the Federal Reserve Bank of Boston. “States like Massachusetts and others are becoming more reliant on sales tax revenues.”
The role of the sales tax in the state’s economy and public policy will likely become a major topic of debate over the next year as business and technology groups launch a ballot campaign to repeal the extension of the sales tax to software services in the 2014 election. Meanwhile, another group has taken the first step to place a question on next year’s ballot to roll the tax back to its 5 percent rate.
The debate will likely touch on issues of equity, fairness, and how the tax burden should be shared. In general, liberals have long contended that sales taxes are regressive because people pay the same amount regardless of income. That means sales taxes consume a larger share of the earnings of low-income families.
Liberals view income taxes as a more equitable way to spread the tax burden. Conservatives generally believe just the opposite —that a sales tax treats everyone the same and that income taxes, particularly graduated income taxes that hit higher income people harder, are inherently unfair.
In the last fiscal year, the state collected about $5.1 billion from its total sales taxes, up from $4 billion before the recession that began in 2008.
Tannenwald said the trend toward sales taxes may be tied to big drops in income tax collections during recessions (the fewer people with jobs, the less income there is to tax); the changing nature of compensation (more people receiving stock options that are later taxed as capital gains, not income); and other economic factors.
Kim Rueben, a senior fellow Urban-Brookings Tax Policy Center, a Washington think tank, said Republicans have increased their power in many states and taken the offensive by trying to replace income taxes with sales taxes.
No matter the reasons, Massachusetts is turning increasingly to sales taxes when it needs money. The 2009 increase to 6.25 percent gave Massachusetts the 13th highest sales tax rate among states, according to the nonprofit Tax Foundation in Washington. This month, Massachusetts lawmakers also broadened the state sales tax to include computer and software services, sparking outcries that the sales tax was being expanded into new areas of the economy and harming the state’s technology services industry.
In addition, lawmakers last month approved a 3 cent-per-gallon increase in the state’s gas tax, bringing it to 24 cents per gallon and potentially raising nearly $100 million more per year.
In the last fiscal year, the state collected about $5.1 billion from its total sales taxes (which includes the general sales tax, the state meals tax, and the motor-vehicle taxes), up from $4 billion before the recession that began here in 2008, state data show. The sales tax now accounts for 23 percent of state tax collections, up from 20 percent three years ago, according to the Tax Policy Center.
Any increase in the reliance on the sales tax is of concern because of its regressive nature, said Noah Berger, president of the liberal Massachusetts Budget and Policy Center. At the same time, he said, the state needs to increase revenues to support services.
“But what’s the option?” he asked, noting that lawmakers and voters have consistently either beaten back efforts to raise or even maintain income tax rate levels. “Short of raising [the income tax], it becomes a difficult and complicated question.”
James Stergios, executive director of the conservative Pioneer Institute, said the increased use of the sales tax has “nothing to do with ideological questions” in Massachusetts.
Rather, he said, lawmakers are trying to raise revenues while upsetting as few voters as possible. Narrowly expanding the sales tax to technology, but not other industry services, is an example.
“They’ll throw anything up against the wall and see what sticks,” he said. “They’re not making any great distinctions here. They’ll take [new tax revenue] anyway they can get it.”
The state’s income tax of 5.3 percent raises the most money, accounting for more than 50 percent of state tax revenues. Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-financed research group, said the state used to have a “reasonably good balance” between its reliance on sales and income tax revenues.
But he said that balance could be disrupted, particularly by extending the sales to technology services. His fear is that it opens the door to tax other types of services — from accounting to house cleaning — down the road, Widmer said.
Rueben, of the Tax Policy Center, said no matter why Massachusetts has drifted toward a heavier reliance on sales taxes, it’s clear that Massachusetts has opted for that policy direction. “It is the equivalent of roughly doing what other more conservative red states are doing – lowering income taxes and raising sales taxes,” she said.