MASS-STAMP 2003: The New Sumptuary Taxes - How Mass. Consumption Taxes Keep the Poor Poor BHI releases white paper on MA sales tax

from NewsLink, Vol. 7, No. 3 - Spring 2003

A new study, released in April by the Beacon Hill Institute and authored by Cornelius J. Chapman, Jr., argues that Massachusetts sales taxes discriminate against low income taxpayers, particularly women and inner city workers.

The study, titled The New Sumptuary Laws: How Massachusetts Consumption Taxes Keep the Poor Poor, argues that the state could dramatically improve the lot of its poor and bring greater fairness to the tax system by reducing or eliminating the sales tax and certain other consumption taxes. It also calls for the establishment of Individual Withholding Accounts (IWAs) that would soften the confiscatory nature of income taxes.

The state’s 5% sales tax, says Chapman, is akin to the sumptuary taxes of colonial Massachusetts, which sought to discourage upward mobility on the part of the poor. “Just as the wealthy among the earlier residents of the Commonwealth tried to prevent the poor from becoming rich, today’s sales tax discriminates against low-income taxpayers,” says Chapman. Taxpayers with before-tax incomes less than $30,000 pay more than 2% of their income in sales taxes. Those with before-tax incomes of $70,000 or more pay less than 1% of their income in sales taxes.

Among the tenets of economics is the two-fold principle that taxes should be economically neutral and fair. Taxes should be neutral in the sense that they do not interfere with taxpayer choices. They should be fair in the sense that they should not discriminate against the poor in favor of the rich. In its current form, the Massachusetts sales tax fails on both measures particularly when one considers the demographic changes – the shift to suburban-centered employment — facing low-income workers.

The study also takes aim at the state’s automobile excise tax and the sales tax on motor fuel. These taxes discriminate against the inner city poor, who depend increasingly on automobiles to find jobs in the suburbs.

Today’s consumption taxes discriminate against working women as well. While groceries are exempt, restaurant meals are taxed at 5%. Working women, especially working mothers, are finding less and less time to dine on tax-exempt groceries and finding it more and more necessary to eat their meals in restaurants or at take-out food outlets which levy a meals tax.

Because of the withholding feature of federal and state tax law, wage earners, in effect, provide an interest-free loan to government with every paycheck. In contrast, taxpayers with unearned income or who receive their wages in the form of partnership distributions, make estimated tax payments on a quarterly basis and get to hold onto their money until these payments come due. By letting taxpayers put their withheld state taxes into an IWA, the state could remove this discrimination against wage earners. At 2% interest, that would mean that state taxpayers would have an estimated $18.9 million more in their pockets by every April 15.

To ensure a more equitable tax system, the study makes four recommendations:

• Soften the burden of income tax withholding by creating IWAs. Employers would place withheld funds in an interest-paying account, from which the Commonwealth would draw tax payments on a quarterly basis. Once the worker’s IWA had been debited for its quarterly payment, the worker would get back the unused funds and interest. This would eliminate a feature of current tax law that favors unearned over earned income, and high-income professionals over hourly-wage earners.

• Reduce or eliminate the sales tax. The state collected $3.7 billion in FY 2002 from the general sales and use tax, which amounted to 25.8 percent of total state tax revenues. Because the sales tax is regressive, reducing or eliminating it would be more beneficial to low-income than to high-income taxpayers. Massachusetts consumers would spend more and would shift their spending from New Hampshire, which currently has no sales tax, to Massachusetts, thus attenuating the loss in revenue to the state.

• Reduce the sales tax rate while broadening the base to make it more neutral with respect to different consumer goods and services. For example, the state could help working women by cutting the rate on restaurant meals and take-out foods, even while it broadens the base to include groceries. It could help low-income workers get to their jobs by cutting the rate on currently-tax items, including car tires, while broadening the base to include cable TV and rare coins, for example.

• Base the automobile excise tax on the actual price paid rather than on the manufacturer’s list price, and eliminate the sales tax on purchases of used cars. Both measures would make automobile transportation – and the jobs that increasingly require such transportation – more accessible to the working poor.
The New Sumptuary Laws is the first of a three part series from BHI that examines state tax policy and the prospects for reform. The second part will identify the economic benefits of reforming the sales tax. The third part will offer a proposal for overall state tax reform.

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