May 14, 2018

Time to get smart on Mass. sales tax

During his speech at state Republican Convention in Worcester at the end of April, Gov. Charlie Baker made it abundantly clear one of his priorities for the campaign and perhaps this year's state budget is relief from Massachusetts' 6.25-percent sales tax, which is the 13th highest in the nation and the third highest in New England.With the Massachusetts Legislature in the midst of negotiations ahead of a July 1 deadline for approval of the state budget, the sales tax issue will likely come to bear before a potential ballot question in November, proposing to reduce the tax to 5 percent, which would give Massachusetts the second lowest sales tax in New England (after New Hampshire's 0 percent) and the 17th lowest in the nation. Baker has already thrown his support behind the ballot question, as well as creating a permanent annual sales tax holiday, after the last two were scuttled amid concerns over tax revenues.

The Massachusetts House budget released in April didn't include any cuts to the sales tax rates, but the $41-billion proposal raised spending only 3 percent, so there is obviously very little appetite for higher tax rates. The Senate $41.4-billion budget proposal released last week has different priorities but still keeps spending levels almost the same. With unemployment levels hovering around a record low 3.5 percent, those additional workers are fueling a state tax revenue surplus projected around $800 million this fiscal year, which creates some room to work with on any sales tax reduction.

Lowering the rate to 5 percent would take roughly $1.2 billion away in potential state revenue. At a time when healthcare costs are eating up a larger portion of the state budget, such a cut may be too drastic. A 5.5-percent rate would be a more realistic target. Baker has hinted at a grand bargain on his sales tax reforms with legislative leaders – along with looks at paid family leave and the state minimum wage – making this an opportune time to reduce the sales tax before the ballot question takes it too far.

The permanent annual sales tax holiday, typically in August, needs to happen. The lost state revenue over the two-day holiday is more than made up by the increased spending at retailers in the state. (In 2016, the Retailers Association of Massachusetts said sales dipped 24 percent in August after the tax holiday was eliminated). Moreover, reducing the sales tax rate from 6.25 percent to a more reasonable 5.5 percent will help retailers year-round, and leave Massachusetts in a tie with Maine with the second lowest sales tax rate in New England.

The Massachusetts economy is continuing to strengthen. Since the state budget covers two years, now is the time to take a reasonable portion of that prosperity and feed it back into the local economy via sales tax relief.


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