Taxes need to be raised in Massachusetts

The Massachusetts Miracle in the late '80s, with annual revenue growth averaging 13 percent from 1984 to 1987, was followed by the high-tech bubble burst. Revenue growth slipped to 4.3 percent in fiscal years '88 and '89, and declined by 4.4 percent in 1990.

That was a real financial crisis. Moreover, the Commonwealth had no rainy day fund; it had to float bonds to cover its day-to-day operating expenses; its pension obligation was 61 percent unfunded with a $12.2 billion liability, on an annual budget of $9 billion; and it had to borrow from the federal government to meet its unemployment compensation obligations.

The result of this crisis was a campaign for governor in 1990 between two fiscal conservatives, John Silber and Bill Weld. Weld's victory ushered in 16 years of Republican governors, marked by a governing philosophy of "no new taxes," and a multitude of tax cuts. Those cuts today would be worth about $4 billion in tax revenue - almost a 20 percent increase over this year's $19 billion tax collection. (The actual net tax decrease this year will be about $3 billion, due to various new taxes and "loophole closings" in the Romney and Patrick years.)

That additional $3 billion could certainly solve today's fiscal problems. Were those tax cuts a bad idea? Artificial savings at the expense of a structural deficit? Not at all.

From 1991 to 2008, program spending increased from $9 billion to $28 billion, more than double the rate of inflation; $16.5 billion was deposited in the state pension fund, reducing the unfunded liability from 61 percent to 31 percent; over $3 billion was contributed to the rainy day fund from budget surpluses; and tens of billions of dollars stayed in the pockets of Massachusetts taxpayers and businesses.

Typically, governments spend at least all that they collect. The enormous revenue growth of the mid-'80s led to no savings, a huge unfunded pension liability, and vastly increased spending. If the tax cuts had not occurred, the Commonwealth's spending would likely have matched all the tax revenue the state collected. Nearly two decades of tight fiscal policy has been an essential brake on state spending, and an appropriate response to the legitimate concerns of personal and business taxpayers about profligacy in state government.

But times have changed. Service delivery is genuinely compromised in vital areas of government. There is also a structural deficit that probably cannot be made up with spending cuts that the public will support.

We have reached the end of the inexorable pendulum-like cycle of government change, from the social investment of Governors Sargent and Dukakis, to the fiscal conservatism of Weld/Cellucci/Swift/Romney, and now back to the demand for social investment under Patrick. New revenues are needed, and that means taxes need to be increased. It should not occur until pension and health costs for state employees are brought to standards that are sustainable and fair in today's environment. It should be done with shrewd phasing, and with full utilization of the stimulus and rainy day funds.

Two new taxes seem obvious. Cities and towns deserve the right to increase meals and hotel taxes at their own option. The gas tax has decreased due to inflation every year since 1991. Simply matching inflation would increase the gas tax from $.21 per gallon to $.34. An additional $.12 would enable a real investment in stabilizing the T and improving our transportation infrastructure, with an environmentally strategic tax on carbon.

But that is not enough, given the public's commitment to widely available healthcare, quality pre-K-12 education, and a public higher-education system accessible to all. Raising the sales tax from 5 cents to 6 cents on the dollar, with certain exemptions, would raise about $750 million. With appropriate reforms and discipline, that should be enough for the Commonwealth to meet its legitimate social obligations. It would also still leave a $2 billion tax-cut legacy.

Steve Crosby, who was secretary of administration and finance for Governors Paul Cellucci and Jane Swift, is dean of the McCormack Graduate School of Policy Studies at UMass-Boston.