Budgets and Revenues

I have written a lot about the budget lately. Obviously, it is the most important document we pass each year as it sets not only the spending levels for each program run in state government, but also details our collective priorities for the upcoming year. It is important we take care of the things that people rely on in the Commonwealth and it is important that we balance our budget to be fiscally responsible.

Most budget discussions center around cuts in spending and revenues. There are a few other things we should consider. First we should take this opportunity to do a top to bottom review of how we conduct business. In 1989, several of us rolled out a plan to raise taxes and cut our budget. We proposed specific ways in which we felt we could better conduct the business of government. We proposed cuts in paperwork, consolidation of services, and we proposed the elimination of 6,000 jobs. That was ten percent of the work force at the time. Today we have grown from 66,000 workers to over 100,000. We need to do the same thing as we did I 1989. This isn’t easy, nor is it politically safe. In 1989, then Representatives Bob Havern and John Bartley, and I, the three proposers of our plan were harshly criticized by conservatives for wanting to raise taxes, and from liberals for wanting to cut our work force. At the end of the day, we enacted our tax plan and cut over $600 million out of government spending.

The other area we can’t ignore is job creation. I have spent time on this before and won’t repeat those posts, but it is important that we create more jobs, and by extension, more taxpayers and more revenue.

One final thought on the sales tax that everyone seems to be migrating to as a way to raise revenues. That would not be my first choice if indeed we have to raise taxes. However, these are the two logical places to look for increases in revenues. Tax policy is incredible arcane and complex. We shouldn’t be setting tax policy in the budget as these need to be thoroughly vetted before we make an informed choice.

Back to sales versus income tax. If we were to raise money, I would look to the income tax first. There are several advantages. First, it is more progressive than a sales tax. The sales tax drives people to the internet or to other states. People may avoid making a purchase of a larger item if sales tax increases makes it more expensive, but everybody take a pay raise even if they pay more in taxes. Most importantly, the average person would pay less if we enacted a slightly larger income tax vs. sales tax. According to the Mass. Taxpayers Foundation, a two penny rise in the sales tax would cost on average $230.00/per capita/yr. It would raise $1.45b.

A rate raise from 5.3% to 5.9% would raise the same amount, $1.45b. However, it would cost the average taxpayer $185.00/per capita/yr. That is a savings of $45.00/yr for the average taxpayer for a tax that is more progressive and is deductable on your federal income tax! This just makes sense to me.

One final final note: In 1989-90, people were very angry over the budget and the tax increases. We will see this again this year. Over the past twelve months, 102,000 people have been added to the unemployment rolls. That means that 1,000,000 people are fearful they will lose their jobs and that means they don’t think they can afford more taxes. When people are nervous about their bills, families, and jobs, it is a hard time to raise their taxes. More importantly, one top of that, we are asking them to pay more for less service. If we passed an income or sales tax increase, the best case scenario is that we restore about a third of the cuts that we are facing. And that is prior to the Senate deliberations that will probably have to base a budget on one half to a billion dollars less revenue than we are basing our budget on. People will be angry and we need to demonstrate responsibility and restrain.