So, there’s been a lot of outrage down here about some developments in the past couple of weeks. While the State Senate here was doing its debate on the budget, two crucial issues came up: freezing the corporate tax rate (excise) and increasing the sales tax by 25% to 6.25%. Let’s start with the first: apparently it was politically unacceptable for anyone to be raising excise taxes to make up for the state’s revenue deficits, so the best that could be managed was a sales tax freeze while sales tax increases were on the table. Simply said, the legislature was perfectly OK with raising the taxes of regular consumers, but when it came to companies, that was perfectly unacceptable.
But first, some background on the situation is warranted. Massachusetts is bound by its Constitution (specifically Article XLIV under the Articles of Amendment) to keep a flat income tax for its citizens, currently 5.3%. The state finds ways to get around this, namely deductions such as the $4,400 personal exemption, no tax status for some people with low income, deductions for renters, the property tax circuit breaker for seniors,and the EITC (Earned Income Tax Credit) also for people with low income. All these help make the tax system more progressive because they proportionally affect people with low income less than others.
However, even with these “fixers”, taxes such as the sales tax and gas tax push Massachusetts taxes as a whole away from progressivity. For the distribution see this graph via the Massachusetts Budget and Policy Center. With the recession dominating the political discourse, spending cuts have been made, but more tax revenue is needed to keep the state government functioning. Thus, this should seem like a golden opportunity to fix the regressivity of the tax system.
With the votes by the Senate to protect the rich by voting down an excise tax freeze and to burden the people with a sales tax increase, this opportunity has been lost. The sales tax is extremely regressive (as you can see with another MBPC graph) and it is just another example of something politically expedient that hurts the common man. Nobody is even offering to touch the income tax or to make it more progressive, even though it would seem that that is a much more sensible choice here. Instead, we have a tax that on top of being regressive, continually raises less than expected revenue, which is why institutions like the MBTA are constantly underfunded.
So what’s a better approach? The simple approach would seem to outright create tax brackets in the income tax by amending the Massachusetts Constitution. The main problem with this approach, sadly, is the political impossibility of getting such an amendment through the legislature. It would have to pass the legislature twice and then go to a referendum to the voters, after which new rates have to be made, passed again, and sent to the Governor. This would take years after any situation could be addressed with short-term taxes, and that is only if everything goes perfectly politically. Not gunna happen.
However, there are ways to accomplish something very close through other approaches. First, increasing the personal income tax credit would eliminate the income tax for families it puts a real pressure on now. No tax exemption only applies to couples with $16,400 and under, and the threshold increases by a thousand dollars for each child. However, families of four who make $60,000, for example, are still put under a heavy load with the income tax. Eliminating their income tax would make the system more progressive, and its revenue shortfalls could be easily corrected with a higher flat tax rate. Another approach could be to extend the property tax circuit breakers to all people by making eligibility for the circuit breakers more lenient and removing the cap on its usage. This would also make the system more progressive, although it would require some spending cuts or tax increases to make up for the lost revenue. All of these ideas have been proposed by other people, but their voices have been lost in the overall debate.
Overall, this debate signifies the new battle lines between progressives and the Democratic Party. In these times of crisis, there is little temptation to turn to Republicans who simply propose balancing the federal budget nationwide to provide “stimulus” or cutting essential programs while also proposing irresponsible tax cuts. They are the ones who have driven Massachusetts to the deficits that have made this recession even worse for those in the state. The new battle lines are between those of us who favor a progressive approach to taxes and increased revenue and those in the Democratic Party who would prefer doing something politically easy like increasing the sales tax instead of tinkering with the progressive income tax or making tough reforms on corruption, transportation, and pensions. This isn’t just limited to wonkish state stuff like this though. These are the same battle lines that we are seeing in the debates over issues like rendition, Gitmo, and healthcare reform. Progressives must have the ability to constantly hammer down the urges of capitulation and moderation inside the party if we are to take full advantage of the majorities we have.
BTW, any help here would be great…I don’t know as much as most people here do about the MBTA troubles and the mayoral race and the Globe agreements, but I’m in the process of learning here. It’s been a great process so far, and I look forward to more of the same.