The Tea Party Comes Back to Boston

Just to get it over with--the Raiders lost yesterday in a heart-breaking, gut-wrenching fashion.  I cried.  Literally.  All I can say is:  Job had it easy.  He didn't have to see the Raiders lose like that.

In other news--which is necessarily more pleasant news because it is impossible to think of anything which would be worse news than that relayed in the preceding paragraph:

In the last 24 hours, I received two, yes two, requests for specific blog posts.  To what is this world coming when Your Humble Narrator is receiving requests for topics to be covered in a blog which earnestly endeavors to cover nothing of particular importance at all?  But, in the interests of the Public Welfare--improving which is certainly necessary given the event recorded in the opening paragraph of this post--I shall henceforth make it a policy--a new policy since the event being covered by this policy is a new event in the history of Mankind--to cover topics which Readers, scarce though they may be, request be covered. 

The topic of the Day:  Sales Taxes in Massachusetts.

This November, there are three issues on the State Ballot. (Three issues seems remarkably small, by the way, compared to what is typically on the California ballot--California is obsessed with ballot initiatives.)  Two of the three ballot issues are measures to reduce the sales tax in MA.  Question 1 abolishes the recently enacted sales tax on alcohol; question 3 would lower the sales tax on all goods covered by the tax from 6.25% to 3%.  I was asked to offer my opinion on these two measures.

First, a little information on taxes. {Insert Loud cheers!} In the US, governments raise funds through three big taxes: income, sales and property taxes.  Given historical quirks, the Federal government relies primarily on income taxes, and Local governments use primarily property taxes.  The states use different mixes of taxes, but most use a combination of income and sales tax.  So, the first big question is: if the State of MA is going to raise funds to pay for the things paid for by the State, which type of tax should it use?  Economic theory does not have a universally accepted answer to that question--a serious argument can be made for income, sales or property taxes as the primary source of revenue for the State.  If we were starting from scratch, I would use the sales tax for state governments.  That isn't a strong preferences; I could be talked into other tax structures easily enough.  But, the sales tax is nice because a) with competition between states, it would force states to economize on the size of the government to keep the sales tax low--it is easier to buy things from another state than it is to earn your income in another state and b) since the federal government does not have a sales tax and local governments have a hard time using sales taxes to pay for local government services (not all localities have sufficient numbers of businesses to make a local sales tax feasible (this is why big cities are more likely to have a separate sales than than small rural towns)), the sales tax would be zero unless states levied one, so it is a nice natural way to raise funds.

As for levying the sales tax on alcohol, there is no particular reason in economic theory why alcohol should not be subject to a sales tax, but there are two interesting practical complications.  First, alcohol is subject to its own set of taxes already, independent of the sales tax, so sales of alcohol will be taxed no matter what happens with proposition 1.  Moreover, the reason food is exempted for the sales tax is because the sales tax is inherently regressive (poor people pay a higher percentage of their income in sales tax than rich people do--since poor people spend a higher percentage of their income on food than do rich people, food is exempted to reduce the regressivity of the tax).  I believe poor people also spend a higher perecatge of their income on alcohol than do rich people, so having a sales tax on alcohol is regressive.  All that being noted, you can get the same effect on alcohol prices by levying a higher specific tax on alcohol as you get by having a sales tax on alcohol.

So, on the straight question how should the state government should raise its funds, I tend to think that sales taxes are not a bad way to do it, and thus if I were picking taxes to lower in the state, I would not choose to lower the sales tax or the tax on alcohol.

However, as odd as it may seem, voters are not being asked to design the tax system from scratch.  So, the real question is: given the current structure of taxes in MA, is it desirable to lower the overall tax burden by lowering sales taxes or should we rather keep the total tax burden the same?  On these grounds, I like the idea of reducing the State's revenue stream; the MA government has not impressed me with its ability to use the funds it raises in a wise fashion, and thus at the margin, it would be better if they had a smaller sum of money with which to play.  (Note this is not the same thing as saying taxes should be reduced to zero--I happen to like the idea of State governments and State governments do need some money to do the sort of things we want State governments to do.)

In other words, I would much rather be voting on a reduction in the state income tax than a reduction in the state sales tax--I think that would be a better way to reduce the income of the state government.  But, given that I don't have that option, I will merrily vote yes on both propositions 1 and 3.  Given that this is MA, I also fully expect that I will be in the minority.  I don't often vote with the majority in this state.

By the way, while we citizens of the state are voting to reduce the taxes levied by the state government, my local town is putting an initiative on the ballot to raise property taxes by roughly 14%.  The Tea Party has come to Boston, but it seems to have bypassed the school building committee in Granby.