There’s considerable chatter in Massachusetts about Proposition One that will appear on the ballot in November and calls for repealing the 5.3 percent state income tax. An earlier version of this proposition nearly passed, garnering 47 percent of the vote several years ago.
I voted for that proposition and it scared the daylights out of me to see how close it came to passing. Like many, I think, I voted for that proposition assuming it had no chance of passage, but wanting to send a message to the institutionally arrogant legislators on Beacon Hill.
One-party rule, insulated from even the slightest intrusion from an opposition governor by virtue of veto-proof majorities, does the state an incredible disservice. Threatening to take away their cash seems to be the only way to hold them in check, given that someone running as an ax murderer has a better chance of getting elected than someone running as a Republican.
This time around, I decided to do some quick and dirty analysis of the potential impact at the local level. The assumptions were simply this:
1) The state, if the income tax gets repealed, will cut off all state aid to cities and towns.
2) By what percentage would the cities and towns have to raise their property taxes to maintain the same amount of revenue?
Now, folks can argue about the assumptions all they want. The first one happens to be a worst-case scenario that says the state doesn’t offer a dime to the communities. Beacon Hill has a history of political cowardice that suggests the cut to local aid will be far greater than the 40 percent cut in receipts to the state that the income tax repeal represents.
The second one assumes communities will be willing to vote for an operating override of equal impact to the lost revenue. From a financial perspective, however, that represents the worst case scenario.
Based on these assumptions, the next step was to look at a cross section of communities based on the following items:
1) Total revenue raised from property taxes.
2) Total state aid received.
3) What state aid is a percentage of the total property taxes.
4) Average property tax bill.
5) The average property tax bill increase.
6) What that average property tax bill translates into in terms of Adjusted Gross Income taxed at 5.3 percent.
Item 6 represents the critical number. If we are to vote based on our self interests, then for whom is it cheaper to repeal the income tax and have that tax dumped onto their property tax bill?
Community State State Aid Increase Adjusted Breakpoint
Property Tax Aid as % of Gross
Bill ($M) ($M) Prop. Tax Income
Ashby $4.0 $3.2 80% $3,042 $2,445 $46,100
Fitchburg $35.0 $54.0 154% $2,584 $3,980 $75,100
Pepperell $13.7 $12.1 88% $3,486 $3,070 $57,925
Westford $54.5 $18.7 34% $6,269 $2,130 $40,200
What the data shows really ought not surprise. The more affluent the community, the better off they will be should we repeal the income tax. The lower one’s income, the higher housing expenses are as a percentage of that income, and therefore the more property taxes represent as a portion of one’s living expenses. Furthermore, the more affluent the community, the less it receives in state aid. Therefore, an affluent community such as Westford that also has a healthy industrial base stands to benefit the most from repealing the income tax while a more troubled, industrial community such as Fitchburg stands to be hurt the most by the repeal.
This, admittedly, takes a purely financial look at the situation. Political theory, however, argues that each individual votes based on enlightened self-interest. This begs the question of how many individuals in households making less than $75,000 in Fitchburg are going to vote for this initiative without realizing it could wind up costing them more, rather than less, money in the long run while thinking what they are doing is voting themselves some tax relief. Furthermore, it remains unclear renters would benefit, given they likely have lower incomes and their landlords will simply pass along the increased property tax costs. Retirees still in their homes, however, likely get hurt the most by this.
Conversely, how many individuals are going to willingly eschew the ability to cut their tax expenses? Back when the one-party Legislature chose to ignore the proposition that rolled back the Dukakis surcharge from 5.95 percent to 5.0 percent before settling on 5.3 percent, a number of liberal lions pontificated as to how we needed to allow taxpayers the ability to “do the right thing” and pay the higher tax rate. As a result we have a voluntary check box allowing us to pay 5.95 percent rather than 5.3 percent.
Fewer than 500 filers opted to pay the higher income tax rate last year. It also has boxed Democrats into a corner. Anyone proposing a tax increase will have their tax records sought under the Freedom of Information Act to see if they have been voluntarily paying the higher rate all along. Tax opponents will hammer any individual seeking to raise taxes on all of us who hasn’t been paying the higher rate themselves.
That initiative from the higher-tax crowd has done more to keep spending in check in this state than anything Barbara Anderson could think of, including calling for repealing the income tax.
People vote for things for many different reasons. If you want to vote to repeal the income tax to give you some tax relief, you need to take a look at the numbers in your community. The more affluent the community, the greater the likelihood you will benefit.
Mr. Woollacott is president and founder of Renaissance Group International Inc., a market research and consulting firm focusing on the information technology market. Contact him directly at email@example.com.