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David G. Tuerck

Want a better safety net? Lower taxes

By David G. Tuerck
February 3, 2010

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IN UNVEILING his 2011 budget, Governor Patrick announced his intention - again - to raise taxes. He wants to collect $162 million in new taxes, including $67 million from taxes on candy, soda, smokeless tobacco, and cigars. This is on top of $900 million in new sales taxes that he got last year and additional corporate and excise taxes before that.

The justification for these tax increases lies in the decline in state tax revenues, which fell by $2.5 billion or 11.9 percent in FY2009 and are expected to rise by only 3.4 percent over the FY 2009 level in FY 2011. So now the governor is scraping the bottom of the barrel. When he wants to raise the tax on a two-dollar cigar to $2.46, we know that it’s desperation time. He now wants to balance the budget on the backs of those few smokers who still enjoy a stogie.

Massachusetts took part in a spending binge that swept the country from 2002 to 2007. A recent study showed that state government spending across the country rose by $2.2 trillion more than needed to maintain existing services during this period. Massachusetts was no more profligate than any other state in this regard. We were just following the herd.

The Scott Brown victory suggests that Massachusetts voters no longer want to be led in this direction. If candidates for office want to tap into this voter sentiment, however, they must reckon first with the state’s still-pervasive blue-state mindset.

One article of faith among blue-state cognoscenti is that, although the state spends generously to help the poor, it never spends enough. By this doctrine, the state’s safety net is frayed, putting at risk those who depend on welfare spending.

A second article of faith is that the state’s structural deficit makes tax cuts irresponsible. The structural deficit equals the amount by which current spending would exceed current revenues during “normal’’ economic times. If the state runs a structural deficit, it must repeatedly draw down reserves or use one-time injections of cash from the federal government to balance the budget, creating the need eventually either to raise taxes or to lower spending. Mix this structural-deficit problem with the frayed-safety-net story and you get only one answer: Raise taxes.

Finally, there is the mindset that governs state budgeting. When the revenue outlook is good, legislators see an opportunity to spend more. When the outlook is bad, they see a need to raise taxes. This stems from the unwillingness of the Legislature to build up sufficient reserves during good years so that it could pay its bills during bad years without having to raise taxes. The result is a steady ratcheting up of tax rates.

Candidates for office who want to challenge this blue-state attachment to high taxes have an important fact on their side: The “frayed-safety-net’’ argument doesn’t hold water. The Beacon Hill Institute calculated per-capita spending by state and local government in Massachusetts on three categories of safety-net services - public welfare, veterans services and unemployment compensation. We found that, adjusted for differences in the cost of living, Massachusetts spending thus measured exceeds safety-net spending by the country as a whole by 30 percent. It turns out that our safety net is a good deal less frayed than the public employee unions would have us believe.

The solution is to impose a tax and expenditure limitation on state spending, either through a constitutional amendment or a simple act of self-restraint by the Legislature. A tax and expenditure limitation proposed by the Beacon Hill Institute would limit the growth of spending to the growth of population plus inflation, thus maintaining a steady flow of services per person. It would eliminate the structural deficit and obviate emergency budget cuts in lean years. Had such a limitation been in effect since 1999, the state would have come close to meeting its 2010 spending target without the need for $1.32 billion in new taxes that it imposed on state consumers and corporations.

Last month, voters signaled that it was time for a different change from what they wanted - and got - in November. Future candidates will be able to capitalize on this sentiment if they know how and why they should campaign for lower taxes.

David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics at Suffolk University.

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