May 2017 Column: Insights on the state revenue system
About a month ago the House passed a fiscal year 2018 budget. Now it’s over to the Senate, and during June a few members from each side will meet in conference committee and work out the differences. Last year before the conference committee had agreed on a final plan, new revenue numbers came in that made the Legislature realize the state had significantly less money to work with than estimated.
Large cuts were made by the conference committee to accommodate. Then, in late 2016 the governor decided revenues were still falling short even compared to the revised estimates, and he made about $100 million worth of cuts that affected MassHealth (our Medicaid program) and many local infrastructure and human service projects. Now we are again getting new revenue numbers that indicate we’ll be over $400 million short in the next fiscal year. And that’s before accounting for the increased spending that’s necessary to update our schools’ foundation budget formula, bring higher education back to the funding level it enjoyed several decades ago, invest in basic infrastructure, and fund the human service programs our communities rely on.
One huge spending factor is the cost of health care, which is about half the state’s budget. If we moved to a single-payer system, or even took temporary steps to increase efficiency, we could save perhaps a sixth or more of the entire $40 billion budget. In this column, though, I’ll discuss revenue issues.
The interesting thing about these revenue shortfalls is that the Massachusetts economy is in great shape. The economy as a whole has recovered from the 2008 recession. Unemployment is low. Business confidence is high. Why are we not collecting as much revenue as expected? No one knows. Some think the Department of Revenue should check whether there’s money that should be collected that’s getting ignored. Some believe underemployment (people working part-time who would like to be working full-time) is still high enough to influence the economic picture even though unemployment itself is low. Some look at specific taxes and why they may be undercollecting – for example, because more people are purchasing online the sales tax isn’t producing as much revenue.
Looking historically, there is a deeper reason: our tax system in Massachusetts is simply structured badly. In the 1990s our economy was booming. We made huge new investments in education and we had extra money for state services. In fact there was so much extra that the Legislature made huge tax cuts. For example, the dividends and interest tax, which overwhelmingly applies to the highest income-earners, was reduced to the tax rate for normal income, and that has cost the state hundreds of millions of dollars a year. Shortly thereafter, a ballot question forced gradual reductions in the basic income tax rate, costing the state another billion dollars or more each year. We are no longer anywhere near the highest-tax state.
We also rely on the wrong types of taxes for funding public services. Our use of property taxes to fund education means that wealthier communities can add extra funding to their school districts while poorer ones can only afford to spend the minimum required (and largely paid for) by the state.
Our income tax is constitutionally not allowed to be graduated. This may change slightly if the “Fair Share Amendment” passes on the 2018 ballot – it would not allow any future adjustments by the Legislature, but would create an extra surtax of 4 percent for marginal income over $1 million per year.
And yes, the sales tax is declining as online sales increase; the gas tax is declining as we drive more fuel-efficient cars; and hotel taxes don’t cover Airbnb.
For now, most legislators and advocates are rightly focused on the Fair Share Amendment – especially given the backdrop of the federal administration and the $2 billion per year we could lose if Medicaid funding is changed. The Fair Share Amendment would generate that $2 billion to keep us afloat, but it won’t solve all the long-term shortfalls we’re experiencing.
In 2019, we’re going to need to revisit the question of not only incremental revenue proposals (taxing Airbnb or online sales) but restructuring the whole revenue system. Eventually we will need a fair, simple, slightly graduated income tax, and if we structure an income-based system right, we could reduce or eliminate all other taxes – property, corporate, sales, you name it. We need to get rid of all the complexity and inequality in our revenue system.