“State to offer early retirement deals; layoffs may follow” is a Boston Globe story about the state government here in Massachusetts facing a $1.5 billion budget gap. With a total population of 6.745 million and a working population of about 3.5 million, that means the average worker in Massachusetts needs to pay $429 more each year in taxes.
Let’s assume that government spending cannot actually be cut. My favorite pet idea for increasing government revenue is congestion pricing for the highways. If the average worker paid $2 per working day in congestion fees, the budget gap would be closed. Traffic jams would be eliminated and people could be more productive, thus generating more income, and paying more income taxes as well.
Another area worth examining might be the Massachusetts alimony system. This New York Times graphic (based on a study by Economics professor Elizabeth Currid-Halkett) shows that people in Boston spend 3.3X as much on alimony payments, relative to their income, compared to citizens of the average American city. When an adult is a dependent on another adult and receives cash payments via a formula based on the difference between their incomes, both have a reduced incentive to work (see this academic paper from the Federal Reserve Bank of Minneapolis, for example). The alimony payor may be in the 80 or 90 percent tax bracket for a marginal dollar of income (i.e., he or she will keep only 10 or 20 cents of an extra dollar earned), thus reducing the incentive to strive for higher pay and therefore higher tax payments to the state government. The alimony recipient will suffer a loss of alimony cash if he or she earns an extra dollar, thus also falling into an exceptionally high tax bracket and resulting in what the Fed economists call a reduction in labor supply (“given the high responsiveness of labor supply to marginal labor tax rates”).
For those who were never married, Massachusetts operates a similar adult-to-adult dependency system through its offer of unlimited child support profits. As in Wisconsin, the Massachusetts citizen who wants to have the spending power of someone in occupation X can either train to become qualified for that occupation and then work full-time or simply have sex with three people in occupation X. Economists would predict that if a person can get tax-free payments for having sex and spending 15 hours per week with children, something that he or she may already have wished to do, that person is less likely to pursue traditional W-2 employment with associated taxes.
As part of our research into family law nationwide we found a fairly typical upper income Massachusetts child support and alimony case where a University of Pennsylvania graduate out-earned her classmates by a factor of roughly 3.2X. After a four-year marriage with a two-year-old child, she sued her husband and obtained a mostly tax-free annual income of $143,808, plus defendant-paid housing and child-rearing expenses. Judge Maureen Monks of Middlesex County wrote, after the trial “[the plaintiff] now has a responsibility to contribute to her child’s financial needs commensurate with her training and skills. There are no health issues that would prevent her from seeking or maintaining some employment at this time. She is capable of earning at least part-time employment, especially given the employment of the full-time nanny and [the child’s] attendance at pre-school and camps.” The successful plaintiff declined our request for an interview but we tracked down the defendant and learned that, despite the judge’s admonitions, the plaintiff has not chosen to return to work. That’s a lost taxpayer from the Commonwealth’s point of view. (See “Women in Science” for more detail on this case.)
[You might ask how common it is for a Massachusetts resident to be affected by the effective higher tax rates that result from being a child support lawsuit plaintiff or defendant. The U.S. Census March 2014 Current Population Survey shows that 9 percent of women in Massachusetts, age 30-40, said that they were receiving child support. If we correct for the known degree by which Americans under-report alimony revenue, that means roughly 18 percent of Massachusetts women in this prime working-age group receive child support. If we assume that the typical child support plaintiff is collecting from slightly more than one defendant, roughly 15 percent of men in the same age group are paying child support. That’s roughly 16.5 percent of prime working-age people in the state who are discouraged from working. (Slightly higher if you want to include the men receiving child support and the women paying, but Census data show that 97 percent of people collecting child support in Massachusetts are women.)]
Massachusetts is #4 among U.S. states in the percentage of residents on Welfare (article: “Only Tennessee, Maine, and California ranked higher”). If you add in child support and alimony we are probably #1 in officially established adult dependency. (Children are only half as profitable in California and Maine, compared to Massachusetts, and the profitability of children in Tennessee is limited by a $25,200/year cap on child support for a single child.) We could presumably get a lot more people to work and pay taxes if they faced the same economic incentives as people in other states.
Massachusetts could consider trying to boost its competitiveness as a corporate headquarters by eliminating tax on corporations. The tax rate is currently 8 percent of profits, but it can also be 0 percent if a company has the connections and accounting/legal sophistication to qualify for various exemptions. The result is that about 5 percent of state revenue comes from corporate taxes (Tax Foundation). This analysis from Suffolk University characterizes our business tax laws as “a hodgepodge of poorly-conceived measures that violate the most fundamental principles of tax equity. They discourages business from locating in the Commonwealth and serve alternately as a target for revenue-hungry state government and a mechanism for dispensing largess to special pleaders.” Why not just tear it all down and be satisfied with collecting income tax, sales tax, property tax, etc. from the employees of and investors in companies that choose to locate here? Massachusetts could then eliminate all of the special programs (and the bureaucrats to administer them; partial list) that provide tax breaks to companies that are politically connected.
What about an equivalent to taxing natural resource extraction, something that works great for other states because it is tough to move an oil well from Alaska to New Hampshire, for example. Does Massachusetts have anything that is valuable and almost impossible to move? Yes! Universities, elaborate hospitals that are technically non-profits, and private boarding schools such as Phillips Academy in Andover (where King Bush II attended high school). Perhaps there are better ways to tax the profit-making parts of these institutions while leaving them as non-profits (albeit non-profits that have somehow managed to accumulate billions of dollars of what a corporation would call “retained earnings”!). For example, if a student comes to Boston and rents an apartment, he or she pays property taxes indirectly (through the landlord). If the same student comes to Boston and rents an almost identical dormitory room, no property tax is paid. Depending on the state, living in a fraternity or sorority may be be tax-exempt (see this article on a controversy in Vermont). From what I can gather, Massachusetts already collects real estate taxes from college fraternities and sororities. As each college student here requires some expenditures on a variety of public services (police, fire, public transport, etc.), the state could consider a “capitation tax” for everyone above the age of 18 who lives for at least 6 months in Massachusetts. There may be as many as 400,000 students here. An annual tax of $3,750 on each student would close the budget gap (coincidentally this is almost exactly 6.25 percent of the cost of attending Harvard for one year and 6.25 percent is the Massachusetts sales tax rate for general goods).
What do readers think? How does Massachusetts get out of this fiscal hole?