Massachusetts should hold a progressive tea party

BY ANDREW KALLOCH

Governor Deval Patrick ’82 (D-MA)

On April 15, 2009, thousands of Americans participated in “Tea Party” rallies that decried expansive government programs and called for government at all levels to shed waste and lower the tax burden on average Americans. The demonstrations have been debated throughout the blogosphere, but the debate has mainly focused on whether the tea parties were a concoction of the right wing, designed to garner media attention, or were legitimate grassroots uprisings. Unfortunately, that dispute has distracted us from the ultimate issue at stake: the future of taxation in America.On Monday, Massachusetts Governor Deval Patrick ’82 wrote a letter to the General Court of the Commonwealth, stating his opposition to any increase in the state’s sales tax. Patrick wrote, “I appreciate the need to raise additional revenue for essential services, and have proposed a number of targeted measures and reforms to help meet the need. Our proposals were thoughtful, data-driven and specific, and, in the case of the gas tax in particular, would create jobs and support economic growth.” Despite his efforts, the Massachusetts Legislature passed a sales tax hike of 1.25% on Tuesday by a veto-proof margin, setting up a showdown between the increasingly unpopular Governor and the always-unpopular House leadership.

Patrick’s opposition to an increase in the sales tax is commendable, not only because a sales tax veto would reduce emissions from Massachusetts residents motoring to New Hampshire to buy tax-free cigarettes and firecrackers, but also because the sales tax is a highly regressive form of taxation.

In lieu of an increase in the state’s sales tax, some have argued for an increase in the state’s income tax, particularly on income above $200,000. In New York, such a proposal, dubbed the “Millionaires Tax,” would raise the income-tax rate from 6.85 percent to 7.85 percent for people earning more than $1 million, and boost from 6.85 percent to 8.6 percent for people earning more than $5 million.

However, maintaining economic growth while constructing a progressive tax system may not be as simple as slapping a “millionaires tax” on state residents. Harvard economics Professor and New York Times contributor Edward L. Glaeser wrote this week of the perils of using “redistributive” taxes at a local level.When states raise taxes on their wealthiest residents, there is an outflow of the wealthy to other states, which deprives the state of many skills needed for healthy economic growth. Glaeser argues persuasively that only a national income tax hike can be effectively implemented without losing talent or having disparate impact on certain parts of the country.

If Glaeser is correct, where does that leave Massachusetts and dozens of other states in need of increased revenue? First, states can achieve redistributive taxation by selectively taxing luxury items. Luxury taxes are effective at achieving two separate aims: collecting revenue and changing consumption patterns. For example, were Massachusetts to slap a 25% tax on Hummer sales, it would not only act as an additional tax on the super-wealthy, but would also lead to a shift in consumer spending away from a product that has harmful side effects to products with fewer externalities.

Second, the state can design taxes that, while regressive on their face, will produce revenue that will disproportionately improve the lives of the poor. For example, if the revenue from a proposed gas tax increase would be spent on improving mass transit, which witnessed an increase in ridership during last summer’s oil price spike, the beneficiaries of the tax would be those who ride city buses and subways-namely, the working class.

Alternatively, as suggested by Harvard Professor Robert Stavins, the revenues from “flat” taxes like a gas tax could be transferred to the Social Security Trust Fund and credited to current workers via a reduction in payroll taxes.

Third, states can shift its tax burden onto outsiders, by way of taxes and fees directed at tourists. For example, Florida has a 1% tax on “transient rentals” as well as a hotel tax that varies by county. Of course, such taxes are not without negative consequences for the state’s tourism industry. Just this week, Florida officials signaled their intention to seek hotel taxes on the full amount charged to consumers by online travel sites, such as Expedia.com. Expedia responded by stating that it would cut Florida-specific advertising from the website if the State followed through with its plan.

Another subtle method of taxing tourists rather than denizens is to adjust the rate people pay for mass transit services. In Boston, locals use plastic CharlieCards, which cost $1.70 per subay ride instead of the paper CharlieTicket, which costs $2.00/ride.

Unfortunately, services will be cut and taxes will be raised regardless of what system emerges from Beacon Hill and other state capitals. America cannot continue to borrow its way to a paper-mâche; prosperity. Only innovative solutions designed to tighten spending, improve our environment, encourage responsible consumer behavior, and place the tax burden on the shoulders of the wealthiest Americans will produce a sustainable society.

Andrew L. Kalloch is a 3L and the Editor-in-Chief of the Harvard Law Record

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