Friday, June 19, 2009

The (Sales) Tax Man Cometh...

The Massachusetts legislature has at last hammered out a compromise State Budget for FY2010 complete with cuts in programs and tax increases. Although at this time the results of the conference committee have not yet been voted on by the House and the Senate, the budget's passage is a foregone conclusion. It is possible that there may be many unhappy members of each body (besides the minute Republican minority) that could vote against it or otherwise later sustain Gov. Patrick's line-item veto cuts.

In addition to some $2 billion in program cuts, up to 15% cuts in local aid, borrowing from the rainy day fund, and stimulus aid, the budget relies on about $1 billion raised from a sales tax increase. Included in that increase was the decision to attach the state's sales tax to alcohol sales. The Senate version of the budget had exempted meals from their tax hike, but the Compromise version does not. Additionally, the final version permits cities and towns to impose their own local options tax on meals of up to .75% effectively capping the meals tax statewide at no more than 7%.

The decision to include the sales tax increase in the final version is a partial if pyrrhic victory for the restaurant industry. All the long, they opposed any tax hike, but were particularly stung by the effort by the Patrick Administration and folks like Boston Mayor Tom Menino, Amherst/Northampton Sen. Stanley Rosenberg, and a host of Boston area Reps to impose a tax on meals alone. The Massachusetts Restaurant Association did not like the taste of being singled out, for the first time, from a more general sales tax. In the end, the local meals tax remains a reality, but on a much smaller scale. They still will have to deal with a 6.25% sales tax, barring any community imposes the meals tax. It could and probably will have an impact on their business as it would on othe retail. Perhaps most disturbing, is not the direct impact on restarateurs, but on servers, whose wages have remained frozen in Massachusetts at $2.63 an hour, the lowest in New England. Servers rely almost exclusively on tips and the higher tax could discourage tipping, racking up bills, or going out altogether.

Ironically, the meager pittance that communities have been granted to impose could serve to discourage its implementation. No doubt officials from councilors to union officials to contractors to mayors salivated at what 2% of meals sold in a community could buy. Surely officials like Menino or Northampton Mayor Mary Clare Higgins must have fully anticipated pushing for the maximum tax indifferent to the damage it could impose on their cities' most vulnerable residents. Instead they only got 0.75%. What the hell is that? Even for a city with numerous eateries, that would generate a marginal amount of money. Perhaps the legislature, in a rare act of forward thinking, wanted the amount to be low so cities and towns will not miss it if the tax is later removed. Moreover, should a desperate community impose it, that locality will not be at as much as disadvantage as their wealthier neighbor.

In Western Mass, Mayor Domenic Sarno, in what will hopefully be a firm stance, said that any effort to impose a meals tax must be done in conjunction with surrounding communities so as not to create too much needless competition. Such a likely alliance would necessarily include Springfield, Chicopee, West Springfield, Holyoke and possibly one or two of the suburbs. Those four cities, however, only minutes apart from each other, contain the bulk of the area's restaurants.

The decision to impose the tax on alcohol sales may be more problematic. The ever looming specter of New Hampshire complicates any effot to raise sales related revenue in Massachusetts. The Bay State already has higher alcohol taxes (usually included in prices) than New Hampshire. This increase, which is effectively a 6.25% increase in price, will surely drive more people into the Granite State. The result will be worse on the border towns. However, this may encourage that rim of economic malaise along the border to creep deeper into the state.

The increase in the sales tax more generally will only further exacerbate the problem in retail more generally. However, the argument can be made that the damage may be limited because much of the border areas retail has already evaporated. The biggest malls beyond 495 north of Route 2 are all in New Hampshire. Whatever retail that does exist is totally convenience based i.e. people too lazy or without enough time to make the sojourn north. Should gas prices continue to rise, the damage might be mitigated. Moreover, restaurants have nothing to fear as the meals tax in New Hampshire tops out at 8%, still higher than anywhere it could be in Massachusetts.

In Western Mass, the CT border communities would lose whatever competitive advantage over the Enfield shopping areas.

There will remain—and this would go on with or without a sales tax increase—a conflict over Bay Staters who shop in New Hampshire, but bring their products back home. The state's Use Tax, essentially a mirror to the sales tax for purchases made out of state, should be imposed whenever a Bay Stater shops north of the border. However the responsibility for filing and paying that tax often rests with the consumer who, unless their truthfulness surpasses that of Honest Abe, would never even think about it. The tax is successfully imposed when an item purchased across the state line is delivered to a Massachusetts address or store. It works both ways for purchases made in Mass, but delivered in NH and with other states like Connecticut, where the sales tax amount differs.

Forgotten in this mess, however, are some great political complications. Although Massachusetts does not tax food or clothing under $175, the sales tax burden disproportionately affects the poor. Countless necessary items that they must pay for from health and beauty products to furniture will carry the higher tax. In claiming to speak for the weak and voiceless by preserving programs, Legislators may have indirectly made their plight worst as the economy continues to ail.

Moreover, there will remain a tremendous deficit for transportation projects. Despite suggesting that a sales tax increase would be a safe alternative to the rancor Gov. Patrick's proposed gas tax, the need for more transportation funding is critical. The prospect of a gas tax remains very real. Most of the State population, especially outside the 128 beltway, was dead set against the dedication of almost of quarter of the increase to the MBTA alone. If the Legilature proposed a fair gas tax before the sales tax increase, the voters might have accepted it. Now it might be politically dangerous.

Finally, as the sales tax dedication to the MBTA has shown, sales tax revenue has declined over the last ten years. While the economy may not be in free fall, we will not be out of the woods for months if not years; as a result incomes—and therefore the income tax, the commonwealth's main revenue stream—will remain weak. The legislature demonstrated this year that the social services lobbies (many of which, but not all, having the purest of intentions) still holds more sway. If revenues come in below expectations next year, what will happen then?

Given the reforms the legislature is enacting—at last—the public may forgive them next year. Still, they came with political risk, like standing up to the public employee unions. Moreover, Democratic Challengers and Republican could easily make the case that these abuses cost billions over the years and earlier action might have spared the state cuts in essential service or tax hikes.

*New Hampshire Seal from wikipedia

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