News and Features: Features
Fear and loathing on the tax trail
What the great tax debate on Beacon Hill is really about.
April 04, 2013
THE MEN IN
expensive suits came by the hundreds, but as they ambled into the ballroom at the Boston Park Plaza Hotel on a cold March morning, they already knew how the show they were about to witness would end. House Speaker Robert DeLeo had tipped his hand the night before, and the morning newspapers lying in piles of slush and snow across the city noted that DeLeo was about to drop the hammer on Gov. Deval Patrick. Patrick had run out a $1.9 billion tax proposal several weeks earlier. The governor’s revenue plan backstopped a significant expansion in new transportation and education spending. With 2014, and the end of his term as governor suddenly looming, Patrick had gone on the offensive, and done so in a big way, making a legacy bid while he still had time to craft one. He hit the Legislature with a multi-billion-dollar shopping list spanning new rail lines and subway cars, aggressive road and bridge construction, universal pre-kindergarten, extended hours for struggling schools, and millions in aid to public higher ed. It was an ambitious turn by a governor who had spent several years wrestling with deficits and spending cuts. The Chamber of Commerce crowd chewed their cold eggs and potatoes, knowing DeLeo was about to crush Patrick. The only suspense lay in the pageantry.
DeLeo let the governor down as softly as possible. He spent most of his Park Plaza speech insisting that there’s no bigger fan of education and infrastructure than he. The governor was right, DeLeo said, to target education and transportation, and he was right to say the state needed to spend money on each. Then he paused, and then he brought Patrick’s whole tax package crashing down. Any new revenue package, DeLeo argued, “should be far more narrow in scope and of a significantly smaller size,” without “creating collateral damage” among residents and businesses. So DeLeo agreed with everything Patrick had put on the table, except for the money part. Which is to say he doesn’t really agree with Patrick after all.
Patrick has been barnstorming across the state since January, trying to roust lawmakers into supporting his tax and spending plan. He has appealed to both their lower and higher selves, dangling district-by-district spending maps in front of legislators’ noses, and exhorting them to “find the political courage to choose what’s right for our long-term good instead of just what’s easy for short-term politics.” None of it has worked. The Legislature looks poised to scrap Patrick’s massive revenue gambit, just as it shot down his 2009 bid to raise the gas tax, and a 2007 effort to raise municipal tax revenues before that.
Lawmakers have expressed unease about both the size and scope of Patrick’s tax plan. It’s too big, they’ve complained. It reaches too deeply into the pockets of taxpayers who are already stretched too thin. They can’t afford it, and there’s no way they’ll bear it quietly.
Beneath those objections, though, there’s something else at play, something much more fundamental.
DeLeo spent much of his Park Plaza speech bobbing and weaving on the details of what he planned to advance in place of Patrick’s tax package. At one point, he joked that he really wasn’t trying to duck questions from the audience before admitting that, well, yes, he was. When the Speaker finally did drop his guard, it was to say that almost all Beacon Hill tax proposals are radioactive: “Look, it’s never an easy avenue, never an easy discussion when it comes to a vote on taxes. No discussion about taxes is easy. I know that.”
Democrats dominate the Massachusetts Legislature, and they live in mortal fear of tax votes. Visions of the bad old days of the 1970s—when financial instability and runaway taxes invited legislative turmoil—still haunt the halls of the State House. The “Taxachusetts” ghosts howl whenever a governor starts talking about raising taxes. This reflexive fear of taxes-past crowds out the present. But it turns out the present isn’t nearly as terrifying as the critics of Patrick’s tax plan make it out to be.
Taxes in Massachusetts are stubbornly average. They have been for the past three decades, and they would remain so even under Patrick’s impossibly huge, dead-in-the water, never-going-to-happen-in-a-million-years $1.9 billion tax proposal.
The fight over Patrick’s tax plan touches plenty of third rails. It’s a fight about the reach and role of state government, about the balance of power between Boston and the rest of the state, about Patrick’s own legacy and ambition, and about the Legislature’s fear of contested elections. It is not, however, about breaking the state’s back with new taxes.
CRUNCHING THE NUMBERS
At first blush, taxes in Massachusetts look abnormally high. In 2010, Massachusetts collected more than $5,100 per resident in state and local taxes. That tax bill was $1,000 more than the national average. On a per-person basis, in 2010, only six states collected more taxes than Massachusetts did. The disparity between what Massachusetts residents see on their tax bills and what most of the rest of the country pays seems to confirm the worst caricatures of the Bay State—that true-blue Massachusetts has a thirst for taxes that far outstrips the rest of the country.
This per-capita measurement sounds a lot worse than it really is. And it shows why taxation is such a tricky subject to nail down in Massachusetts. It’s easy to start, and end, a conversation by saying that Bay State residents own some of the highest tax bills in the country. It’s much more difficult to argue that, while the numbers on tax bills here look sky-high, they actually aren’t.
Patrick’s tax proposal would raise the state income tax rate from 5.25 percent to 6.25 percent. It would cut the state sales tax from 6.25 percent to 4.5 percent. It would raise taxes from the sale of candy, soda, and cigarettes, make some modifications to the corporate tax code, and swap a number of personal tax write-offs for a broader personal tax exemption. All told, these maneuvers would raise $1.9 billion in additional annual revenues; Patrick would use the new taxes to pay back bonds for a new $13 billion transportation spending program, and $900 million in added annual spending on new education programs, from pre-kindergarten to college. And they would shift the weight of the state’s tax burden, with poorer residents paying somewhat smaller tax bills, and upper income residents paying more.
To put Patrick’s tax plan in context, CommonWealth compiled tax data for all 50 states, going back to 1963. We layered this tax data, drawn from the US Census Bureau and encompassing all state and local tax collections, with data on economic performance from the US Bureau of Economic Analysis, and Massachusetts state budget data from the office of the state comptroller. These figures combine to show how taxes in Massachusetts compare to the rest of the country over time, and how state taxes have evolved.
The Massachusetts tax bills that are higher than those in other states only tell part of the story, and it’s a very incomplete tale without the other pieces. Wages are higher here than in other states, too, and the economy is more productive. The state’s stronger economy and higher wages more than make up for the high sticker price on residents’ tax bills. So as a share of residents’ income, or as a share of the state economy, taxes are actually lower in Massachusetts than they are in nominally low-tax states like Kansas, West Virginia, and Indiana. Economists with opposing views of the governor’s tax plan agree on using taxes as a share of overall income, and not per-capita tax collections, to gauge the impact of taxes on residents. This calculation provides a common baseline with which to frame the tax debate, and measure the impact of the governor’s $1.9 billion tax plan.
Census data show that, as a share of their income, Massachusetts residents pay an exceedingly average tax bill. The Bay State’s overall tax bill falls squarely in the middle of the 50 states: It has the 26th-highest tax burden as measured by income, and the 24th-highest as measured by economic output. (These figures cover both state and local tax collections; they are for 2010, the last year for which the Census data were available.) As a share of the state’s economy, Massachusetts taxes are slightly higher than the national average (in 2010, Massachusetts state and local tax collections equaled 8.9 percent of gross state product, compared to the 8.8 percent national average), while the state’s taxes as a share of income currently stand below the national average. The income measurement actually overstates the tax burden on Massachusetts residents, since it doesn’t include capital gains income.
“We’re in a fortunate position in this state,” says Noah Berger, president of the liberal Massachusetts Budget
and Policy Center. “We’re wealthier, and the revenue base is higher, so we can spend more on things like education. Some states are in a death spiral of cutting education, and then taxing off a lower base. We’ve been able to escape that.”
Massachusetts earned its Taxachusetts moniker in the 1970s, when tax bills soared at astronomical rates. In 1969, the state owned the country’s 16th-highest tax bill as a share of income; by 1977 and 1978, it ranked third. Over the course of the decade, taxes shot up an average of 16 percent every year. Those sorts of increases aren’t sustainable, economically or politically. The late ’70s saw Massachusetts become a crucible in the national tax wars. In 1980, two years after the state’s governor, Michael Dukakis, fell to the fiscally conservative Ed King in a Democratic primary, voters approved Proposition 2½. The ballot question threw the brakes on runaway property taxes, and served as a dramatic shot across the bow of the Legislature.
State and local taxes began falling before the enactment of Prop. 2½, but the law brought Massachusetts taxes in line with the national average. It has kept tax collections around the national average for 30 years—through the booms of the 1980s and late 1990s, through the deep recession of the early 1990s, and through the wild economic swings of the past decade. Taxes have stayed below the national average since 1999, even in the face of a pair of $1 billion state tax increases over the past decade.
Patrick’s $1.9 billion in tax increases wouldn’t drastically alter that balance. DeLeo has indicated that the Legislature will pare down the size of Patrick’s revenue proposal. But even if it didn’t, and Patrick got everything he asked for, $1.9 billion in additional taxes would bump Massachusetts from 26th to 17th in taxes as a share of income using 2010 state data. That ranking would put Massachusetts just ahead of Michigan, but behind Indiana. The state’s tax bill would move slightly higher than the national average, but it wouldn’t be the kind of radical outlier it was in the late 1970s—not unless Indiana is also a radical haven of taxing and spending. Measured as a share of the state economy, Patrick’s $1.9 billion would move Massachusetts up the list from 24th to 18th.
“We would still be well positioned with respect to our regional and economic competitors,” argues Glen Shor, the state’s secretary of administration and finance and Patrick’s top budget deputy. “We need to be mindful of our burden relative to other states, but we are not Taxachusetts today, and this proposal would not result in us becoming Taxachusetts.”
WALRUSES AND FLUFF
Bill Weld caught fire right around the same time the Massachusetts economy did. The former prosecutor found his voice amidst a landscape of failed banks, rock-bottom real estate values, gaping budget deficits, and state debt that hovered inches away from junk bond ratings. That voice was one of rock-ribbed fiscal conservatism. Weld mocked Michael Dukakis’s big, failing state government. He embraced a ballot campaign to reverse $2 billion in tax increases, and promised to slash an additional $1 billion from the state budget, in part by laying off 10,000 state workers. And then he took office, and reality set in. Weld shed a big sales tax hike, but he ended up using every dime of the Dukakis income tax increase he decried on the campaign trail. The $1 billion in cuts failed to materialize. Weld’s 1991 budget was bigger than the 1990 spending plan his predecessor enacted; the one in 1992 was bigger than that, and 1993’s grew, too.
Last December, two decades after Weld shouted down waste, fraud, mismanagement, and walruses in state government, Rep. Dan Winslow was knocking on then-Administration and Finance Secretary Jay Gonzalez’s door, bearing an armful of marshmallow Fluff. Winslow once served as a state judge, on an appointment from Weld; these days, he’s a state legislator, professional provocateur and US Senate candidate. He was at Gonzalez’s door, tubs of sugar in hand, because the then-state budget chief was trying to plug a half-billion dollar hole in the state budget with local aid cuts and borrowing from the state’s rainy day fund. Winslow’s 10 tubs of Fluff directed Gonzalez’s attention elsewhere—illegal immigrants, welfare cash, and executive branch press aides. Gonzalez returned the gift, calling Winslow’s jab at budgetary fluff “just not realistic.”
As the Weld and Winslow examples illustrate, the state budget is an irresistible target. It just sits there, $32 billion large and getting fatter every day. There’s great temptation to shake it until the $1.9 billion Patrick is after falls out. Things usually don’t work out that way. For one, the budget isn’t nearly as big as it looks. In Fiscal 2012, Medicaid, pensions, and debt costs ate up 40 percent of the budget; add in in local aid, and 59 percent of the budget was spoken for before the state’s courts, colleges, and human service agencies saw a dime. Health care costs have slowly crowded out nearly every other account in the budget. Since 1990, real inflation-adjusted spending on Medicaid has swelled by 128 percent, compared to a 38 percent increase in the overall budget, and a 15 percent increase in all non-Medicaid spending. These increases leave more programs fighting for fewer dollars: According to Mass. Budget, between 2001 and 2012, real inflation-adjusted spending on early education fell by 28 percent, higher education aid fell by 31 percent, and local aid fell by 46 percent.
Transportation costs have outpaced transportation spending for years. As a result, the Department of Transportation is paying employees with borrowed bond money, the state has many more rickety bridges than it can afford to fix, and MBTA subway cars are running decades past their retirement dates. Patrick’s failed 2009 gas tax proposal was supposed to fund a winnowing down of the list of deferred maintenance projects; instead, budget deficits have persisted, and maintenance bills have climbed. A fire in an old electrical line shut down the Green Line on the morning Patrick sent his budget to the House.
“It’s not like we’re surprised by the deficit at the T, or, as well as we’ve done, the amount of deferred maintenance in our roads and bridges,” Patrick says. “We are exactly where I said we’d be if we didn’t do the gas tax.”
The geography of where these bills fall creates a political problem for the governor. The T has enormous budgetary holes, and Patrick’s tax plan funds them in a big way: It covers $3.2 billion in operating deficits at the agency, and spends $4.9 billion on new subway cars, buses, and track and electrical repairs, as well as construction projects expanding South Station and extending the Green Line to Medford. That’s a lot of money spent on the urban core, making the plan unsalable to legislators outside Boston. So the governor has balanced it by spreading more money across the state. Regional transit authorities get a piece of the action. New Bedford and Fall River get their rail expansion. Suburban legislators get new highway interchanges. Springfield gets a rail expansion on top of a huge highway reconstruction. If politics is a game of addition, addition has swelled Patrick’s transportation tab well past legislators’ comfort points.
Deval Patrick is in his element. After DeLeo rained on the governor’s revenue-raising parade at the Park Plaza Hotel, busloads of union workers and liberal activists have crammed into every inch of a State House basement auditorium to let Patrick know they have his back. They’re spilling out of the balconies and crowding the rafters. And Patrick has them in a frenzy. He’s back in campaign mode, preaching the gospel of roads, schools, and taxes. He comes out hot, voice raised, pounding the podium, then he dials it back, standing there easily, his left hand in his pocket, enjoying a casual conversation with several hundred of his closest friends. He tells them he’s pushing for billions in new spending on roads, rails, and schools because that’s what his friends in the audience, and across the state, have asked him to do. People want better transportation and better schools, he says, and most of them recognize that these things cost money. He tosses off the clearest explanation of what his tax plan costs that he’s given in the two months he’s been pushing it: The tax hike falls mostly on the state’s highest earners, but even those earning north of $100,000 would see their tax bills rise by magnitudes of hundreds of dollars, not thousands. “Now, that’s not nothin’,” he says, misplacing a G. “That’s real money... But the folks who are more fortunate, I don’t think it’s wrong to ask them to contribute according to their ability to pay.”
"It's never an easy avenue, never an easy discussion when it comes to a vote on taxes," says House Speaker Robert DeLeo.
The governor is at his best when he winds it up for a friendly crowd, and on this gray March morning, he’s in top form. He begs the crowd to resist “what we always seem to do in this Commonwealth, and in this country, which is running the other way when it’s time to talk about taxes,” and instead talk honestly about taxes, “because taxes are the price of civilization.” That isn’t a problem for these folks, who have assembled on Beacon Hill to lobby for higher taxes. So Patrick sends them upstairs, clipboards in hand, to knock on the doors of all 200 legislators.
There’s a disconnect between the way Patrick approaches taxes and the way the Legislature does. The governor built his revenue plan from the ground up. The $1.9 billion he’s asking for is the price tag of all the things he wants to do—the early education initiative, the aid to struggling schools and colleges, and the cost of carrying the bonds to pay for a host of new bridges, roadways, and subway car fleets. (“To be perfectly blunt with you,” he said at a January press conference, “you don’t ask for money without having a plan” to spend it.) You can pick on the projects Patrick put on his list, like the hugely expensive South Coast Rail expansion, but no one is disputing the cost of the line items on the governor’s wish list. Even after shaving off the big-ticket transit expansions and road interchange projects from the governor’s $13 billion list, the transportation tab still tops $9 billion. The revenue number is big because there’s a lot of need.
The Legislature, on the other hand, is playing it less by math and more by feel. Legislative leadership hasn’t shot down Patrick’s tax request out of hand, as happened with the 2009 gas tax bid. But DeLeo has said he’s looking for a “magic number” to pin on the House’s transportation plan. Which is to say, the House is starting with a revenue figure they can sell membership on, and then telling the governor to go buy what he can with it. After he spoke at the Park Plaza and pinned his opposition to Patrick’s tax plan on the package’s size and scope, DeLeo fielded a question about how taxes in Massachusetts compare to other states, and whether Patrick’s $1.9 billion in new taxes would significantly alter the state’s standing. “I think we always want to get to a point where we’re in a better situation than other states, but I think we are competitive,” he said. He didn’t put a number on how high up the tax burden rankings Massachusetts would have to climb to make the state uncompetitive; instead, he grounded his opposition to the tax plan in his gut. “The concern I have is the effect, if we go to that level that quickly, what the effect is going to be on businesses and families. That that might be just a little bit too quickly and too large an amount.”
Patrick’s allies in the Legislature say largely the same thing—that the debate over Patrick’s tax plan has been more about blunting a large revenue figure than debating whether the figure is appropriate. “I’m hearing we’re overreaching, that the number is too much, there are doubts about whether it’s doable,” says state Sen. Dan Wolf, a Cape Cod Democrat and vocal backer of Patrick’s plan. “This discussion needs to be very data-driven. We can’t aspire to great government, great services, and expect to pay less than everybody else.”
There are plenty of avenues to contest Patrick’s tax proposal on. Michael Widmer, the president of the Massachusetts Taxpayers Foundation, says that while businesses and interest groups outside the State House were expecting a push on transportation funding, Patrick’s bid to add spending on education caught many by surprise. As a result, he argues, the programs Patrick wants to fund haven’t been vetted fully, and come with much less oversight built in. Charlie Baker, Patrick’s 2010 Republican opponent and a potential candidate in 2014, argues that any tax increase would chase away businesses and lock in the state to its recent pattern of stagnant job growth. Jim Stergios, executive director of the conservative Pioneer Institute, acknowledges the need to put more money into transportation, but he criticizes the state’s habit of meeting every need with “a gold-plated, universal solution,” and the reflex of meeting every government shortcoming with a new government program.
The objections that Widmer, Baker, and Stergios raise haven’t factored into the current tax debate. There will be no debate about whether it’s good policy for Massachusetts to spend money on universal early education, or commuter rail to New Bedford, or a pair of massive new highway interchanges on Route 128, because legislative leadership has declared the entire tax package too big. The data may not back this claim, but sweeping proclamations about unacceptable costs are enough to halt debate, and they obscure the real tension behind the programs Patrick has put on the table.
It’s no accident that, when the Boston Herald asked Worcester Rep. John Binienda about Patrick’s tax package, he responded with an anecdote he told the governor about the year Bill Weld and a crop of anti-tax Republicans took Beacon Hill by storm. “I explained the election of 1990 to the governor,” the Democratic lawmaker told the paper. “The governor’s not coming back. He’s finishing off his term and he’s gone. I don’t know how many people he’s going to get to fall on their sword for him.” Two weeks later, Binienda put it in even simpler terms: “Some of us want our jobs back.”
Walk into the reception area of the governor’s office, grab a seat on a couch, and you’re staring at four portraits: Mitt Romney, Jane Swift, Paul Cellucci, Bill Weld. They’re the last four governors to occupy the Corner Office before Patrick. They’re all Republicans. And they give any visitor to Patrick’s office an idea of what the Legislature fears every day. The guy on the right, the patrician with the denim, and the armadillo—he’s the scariest one of them all.
Democrats dominate Beacon Hill. They don’t have very many bad election cycles. But the ones they do have linger—especially the ones that enabled Prop. 2½ and Bill Weld. The Democratic Legislature has left those
days behind by tacking to the right. Except in extreme circumstances, like when recessions blow multi-billion dollar holes in the budget, tax talk is generally anathema. Unabashed liberals like Wolf are outliers; most Democrats’ job security on Beacon Hill now depends on crowding out their would-be opponents on fiscal issues. This is what legislators such as Binienda mean when they complain about the size of Patrick’s tax proposal: It’s big enough to make their next election cycle miserable, which means it’s too big.
The pro-tax rally that saw Patrick making union activists swoon was actually the governor’s second trip to the State House auditorium in a week. The first visit saw the governor in a much more reserved mood, trading pleasantries with House and Senate ways and means committee members. Patrick made his case for funding education and transportation spending, but the conversation turned to State House politics.
“The citizens I represent want all the things you listed, it’s just that, many of them don’t want to pay for them,” Sen. Marc Pacheco told Patrick. Pacheco, a veteran Democrat from Taunton, then suggested putting Patrick’s tax proposal on the ballot. “It’s not because I’m afraid to vote, or because I don’t have a backbone, but because I’ve seen what happens,” Pacheco said. What happens is folks like Bill Weld. Pacheco predicted that anti-tax activists would begin organizing a ballot question to repeal any tax increase 15 minutes after it passed the Legislature, and said he feared the repeal effort would dominate the 2014 election cycle. “The [ballot] question will be leverage to try to change the type of governor we have, and the type of Legislature we have,” he said.
A BIG ASK
Deval Patrick has heard legislators’ political angst. He doesn’t buy it.
It’s a Monday morning in mid-March, and Patrick is sitting at a large table in his sunny State House office. As he defends his tax push, the governor plays idly with his reading glasses. His black lab Toby is sprawled out on the rug at Patrick’s feet, sleeping. At this table, in the run-up to his 2010 reelection, Patrick weighed whether to sign a $1 billion sales tax increase the Legislature had sent him. The sales tax was the Legislature’s idea, not his. His political advisors had urged him to veto the tax: “Don’t sign it, that’s the end, you won’t get reelected,” Patrick says they told him. He signed the tax increase, and then he defended it, successfully. For Patrick, the lesson is that politicians don’t have to fear tax increases, as long as they believe in whatever the taxes buy, and they’re willing to defend it.
“We are constantly underestimating voters,” Patrick says. “Not that explaining to them always means they’ll agree, but I think they bridle at the notion they’re being played, that we’re trying to outsmart them. I think we owe it to them to say, ‘Look, you sent me here to do what’s right, this is my best judgment, this is why, make your judgment.’”
“I don’t want to be offhand or light about the ask. It’s a big ask,” he adds. “Nobody wants their taxes to go up. I don’t want my taxes to go up. That’s why it’s so important that we connect what we’re asking people to spend to what they get.” When asked to choose, Patrick says Massachusetts residents want better transportation infrastructure, not less. They want schools to work for everybody, and understand that more money is part of that equation. “There’s a lot of consensus about what to invest in, and the worthiness of it,” he says. “And there’s the predictable queasiness about asking people to pay for it. When I say predictable, I mean, not just among political people, but the general public.”
Patrick then offers a grudging nod to Grover Norquist, head of the Washington-based Americans for Tax Reform. Patrick was at Harvard with Norquist, who has made signing his group’s no-new-taxes pledge a litmus test for Republican candidates. “My classmate Grover Norquist’s no-new-taxes thing has become a real part of the sort of instinct of people,” says Patrick. “My point here is, we can have more accelerated growth if we invest, but we have to decide to make the kinds of sacrifices in our time that our grandparents did in theirs.”