Last January, Governor Patrick announced a budget proposal for 2014 that would increase state taxes annually by $1.9 billion for the purpose of funding an “investment” in “education, innovation, and infrastructure.” The governor also recommended a number of tax changes, which, he says, would provide for “a more progressive, equitable and transparent tax structure.”
The governor’s proposal to cut the sales tax rate from 6.25 percent to 4.50 percent and to increase the income tax rate from 5.25 percent to 6.25 percent would have roughly offsetting effects on revenue. The new $1.9 billion in revenue would come mainly from the elimination of a billion dollars’ worth of income tax exemptions, from an increase in the tax on tobacco and from increases in business taxes.
Now House and Senate leaders have countered with a plan that would raise just $500 million in new tax revenue to be spent on transportation. Under this plan, the Legislature would combine a few of the governor’s original proposals (including new taxes on tobacco and on computer services) with an increase in the gas tax.
The governor is threatening to veto this measure. If he does, the Legislature should override his veto.
The Beacon Hill Institute has issued reports over the last 12 years in which we compare Massachusetts’ competitiveness against that of the other 49 states. Patrick has noted on several occasions that Massachusetts usually ranks first on our competitiveness index, as it did in our latest report. The index gives a substantial amount of weight to those factors — in particular, education and infrastructure — whose importance the governor emphasizes in his 2014 budget proposal. It also, however, recognizes the negative effects of higher taxes on competitiveness.
The state is losing ground is terms of its tax competitiveness. Its competitive ranking in total taxes per dollar of state domestic product has fallen from 19th in 2005 to 43rd in 2012. The governor’s proposal would exacerbate this trend by increasing overall tax collections by almost 9 percent. Taxes on personal and corporate income would rise by 22 percent.
In proposing these tax increases, the governor is ignoring conditions that have many of the state’s competitors breathing down our necks. North Dakota ranks just behind Massachusetts in competitiveness and imposes a top income tax rate of only 3.99 percent. Texas, which ranks 7th, and Washington, which ranks 8th, levy no personal income tax at all. Kansas, which ranks 10th, just enacted a series of income tax cuts that will lower its top rate from 6.45 percent to 3.5 percent. The governor of Louisiana, which ranks 37th but is on the march, wants to eliminate its income tax. Arthur Laffer and Stephen Moore recently predicted that “the region stretching from Florida through Texas and Louisiana could become a vast tax-free zone in the next ten years.” Does the legislature really want to take on that sunbelt behemoth by raising Massachusetts income taxes by $2.5 billion?
The House-Senate plan is imperfect. It does raise taxes, after all, and in an arguably infelicitous fashion, when it would have been possible to free up $500 million in transportation revenue by belt tightening elsewhere. But state legislators can feel comfortable overriding the governor’s veto and living with what their leaders have produced, in that they will thereby avoid delivering a far more severe blow to the state’s economy.