Governor Patrick isn’t just proposing to raise more money for transportation and education. In seeking a major income-tax hike, a much lower sales tax, and the elimination of a host of deductions, he’s also looking to perform major surgery on the state’s revenue system. Patrick’s tax plan reflects some important principles that the Legislature should also observe, most notably the need to spread the burden of taxation fairly. Yet in their quest to bring in more revenue for real needs and strategic investments, the Legislature should recognize that a complicated tax structure can only be remade so quickly. A simpler mix of tax reforms, with a smaller hike in the income tax, a modest increase in the gas tax, and no change to the sales tax, would still meet the Commonwealth’s needs.
Patrick’s proposal couples a hike in the state income tax, from 5.25 percent to 6.25 percent, with a reduction in the sales tax, from 6.25 percent to 4.5 percent. It would also raise the personal exemption for all tax filers while eliminating a raft of sales, income, and corporate tax deductions. The result, Patrick says, would be a system in which lower-income workers face less of a burden, while those with higher incomes pay a greater share.
Yet because Massachusetts already exempts food and most clothing from the sales tax, a deep cut in that rate isn’t needed to make the state tax code more progressive. And without that sales tax decrease — which on its own would cost the state treasury more than $1.3 billion a year — there would be less need to scour the budget for new sources of revenue.
As proposed, the need to compensate for the sales-tax reduction sends Patrick’s plan in surprising directions: He would, for instance, remove the deduction for tuition expenses that exceed 25 percent of a filer’s income. Scholarships and fellowships would count toward personal income. While the proposed increase in the personal exemption might make up for those and other changes over time, families who use the current tax breaks would feel a noticeable bite.
Meanwhile, the plan also contains changes to arcane business taxes whose impact is, at best, difficult to assess. Patrick would apply the state sales tax to purchases of customized computer software and data processing — which fall between goods, which tend to incur sales taxes, and services, which generally don’t. But Massachusetts shouldn’t rush to enact a major policy change that would likely nick businesses that buy Web services, medical providers setting up electronic records, and firms that extract information from vast data sets. That the take for the state could be substantial, perhaps $265 million a year, also implies the tax would strike a wide variety of businesses.
None of this is to say current practices should be sacrosanct. Patrick has proposed two tax changes that are clearly beneficial on their own terms: removing a sales-tax exemption from candy and soda and increasing the tax on cigarettes. Those moves would raise about $220 million per year, according to the Massachusetts Taxpayers Foundation. Cutting some of the corporate exemptions and loopholes targeted by Patrick could raise $100 million more. If the personal exemption (currently $8,800 for joint filers) were roughly doubled, as Patrick proposes, the state could remove the smaller deduction for children under 12 (thereby adding $162 million to state coffers), and families would still come out ahead.
Eliminating only those deductions, along with keeping the sales tax at 6.25 percent, would give the Legislature the room to pass a smaller income-tax hike of about half a percentage point — returning the rate to where it was about a decade ago — and still have almost enough for the transportation and education investments the state needs. Another tax change under consideration would close the rest of the gap: Raising the gas tax — something Patrick proposed several years ago but avoided this time around. It’s understandable why Patrick is reluctant to go back to the pump. The gas tax has some regressive qualities, and it’s especially unpopular in the least urban areas of the state.
For those reasons, the gas tax shouldn’t be the main vehicle for raising revenues. But the tax, which hasn’t been raised since the early 1990s, also has some benefits: It discourages carbon emissions, generates more money for infrastructure, and reduces congestion by steering more commuters toward public transit. And because it can be dedicated more readily than other taxes to transportation, it gives voters more reassurance that it will be spent on its intended purpose. Thus, a limited gas tax hike that is phased in over a few years, and then rises slightly with inflation, should have a place in a well-crafted state revenue package.
There are many combinations of spending decisions and tax changes that could adequately cover most of the initiatives Patrick proposes, as long as legislators hew to a few broad goals: avoid an unnecessary cut in the sales tax, make the overall tax burden more progressive, and preserve the benefits that are most important to middle-class security and corporate competitiveness. It’s a difficult, complicated exercise, but the benefits of viewing each proposed change rigorously, with an eye toward how it fits into the whole, should result in a package of changes that moves the Commonwealth forward without unduly burdening any single constituency.