Last week, Governor Patrick proposed increasing the income tax and eliminating over $1.25 billion worth of deductions to “support our schools and our highways and byways, and do it for every corner of our Commonwealth.” But his proposal isn’t just a net increase in taxes. It also involves significant redistribution. The income-tax hike would be coupled with two changes that shift the tax burden away from lower-income families: a 1.75-cent reduction in the sales tax and a doubling of the personal exemption.
Patrick’s two-pronged proposal deserves a two-pronged analysis: First, should the government spend more? Second, should the Massachusetts tax code become more progressive? On the latter point, playing Robin Hood at the local level could be dangerous, because businesses and prosperous residents can relocate so easily.
It does, though, make sense to increase spending on public services that strengthen the Commonwealth. Last week, the governor stressed the need to “invest in education, in innovation, and in infrastructure.” His commitment to education rings true, and his proposal for a longer, more enriching school day for every middle school in the state’s so-called gateway cities could do considerable good. Cities and states rise, or fall, based on their human capital.
Indeed, education is a better tool for aiding the gateway cities than foolish public projects meant to prop up declining areas. The governor is also right to vow to “reinvigorate” a program that helps poorer children attend public and independent colleges throughout the Commonwealth.
The use of public funds for infrastructure is more problematic. The governor wants us to imagine smoothing out the interchanges on Route 128 in Canton and Woburn, but general tax revenues shouldn’t subsidize car commutes. User fees like tolls are a fairer and more efficient way to pay for infrastructure; they reduce the potential for white-elephant projects that provide little benefit, and the people who benefit pay the cost. In the same spirit, the governor’s vision of rail service to New Bedford also only makes sense if riders value that service enough to pay for it themselves.
Regardless, to focus only on Patrick’s spending proposals is to miss much of the point, because increased tax progressivity is actually the larger part of Patrick’s plan. It includes a gross increase of $4.4 billion, which represents 23 percent of current budgeted tax revenues. The governor wants to use 44 percent of those added revenues to increase spending, and 56 percent to cut other taxes that hit the less prosperous. That includes a $1.1 billion tax reduction from doubling the personal exemption and a $1.4 billion reduction from lower sales taxes. After this progressive tax twist, a family of four earning $160,000 will pay $1,000 more, and a childless couple earning $30,000 will pay $500 less.
The governor’s redistribution agenda seems to ride President Obama’s coattails, but the case for a more progressive tax code is stronger at the national level than at the state level. Businesses and the wealthy find it far easier to relocate across state lines than national borders. My Harvard colleague Martin Feldstein, together with economist Marian Wrobel, examined tax data in the 1990s and concluded that “state and local governments cannot redistribute income,” because people and businesses can just leave for jurisdictions with more favorable tax conditions. A separate study of a 2004 New Jersey millionaires’ tax concluded that it resulted in the loss of $2.5 billion in income in the state.
The threat of outmigration may explain why state and local taxes, in Massachusetts and elsewhere, are generally regressive. According to the Institute on Taxation and Economic Policy, Bay State families earning over $683,000 in 2009 paid about 4.8 percent in state and local taxes — just under half the rate for families earning under $41,000. Yet judged against other states, Massachusetts is not particularly regressive; Florida and Washington State tax their bottom fifth at rates five times higher than for the top 1 percent.
Governors can only follow their progressive instincts so far. Patrick could get his extra revenue by raising income taxes one-half of a percentage point, cutting the sales tax to 5 percent, and leaving the exemption alone. We should invest in the Commonwealth. We should also recognize that moving elsewhere is too easy to risk much redistribution at the state level.