Taxes and Fairness

All governments have to levy taxes in order to provide services to their citizens.

(Anarchist societies are the exception. They do not have any government and all of their exchanges are between individuals and are voluntary. There are not that many functioning anarchist societies in the modern world.)

We raise the revenue we need from taxes and fees and we make expenditures to carry out programs and services the government decides to support.

A democratic society, as opposed to an authoritarian society, allows for a civilized debate on the nature of these taxes (revenues) and the quality and quantity of services (expenditures). Social and economic class play a major role in the debate that flows back and forth in a democratic society.

I would like to make a few comments about the fairness of different types of taxes, as they relate to the Town of Longmeadow.

We rely heavily on the property tax in Longmeadow. In our current fiscal year, FY08, we got $35,956,387.00 from property taxes. That translates into 77.68% of the General Fund. (Source: 2008 Town Meeting Warrant, p. 12.)

According to that same source, the State Aid amount was $6,142,920.00. The Commonwealth by way of income taxes and sales taxes collected that money. 13.27% of our General Fund came from the State.

Another source of income for the Town of Longmeadow is the Excise Tax on motor vehicles. This brought in $2,150,000.00 and was less than 5% of our General Fund.

Let’s look at each of these and make a reasoned judgement as to their fairness.
I define fairness with respect to the ability to pay. Wealthy people can afford to pay more in taxes than poor people.

Property tax: The value of the home that you live in has some correlation with your ability to pay taxes. The value of your real estate does not correlate with your income. The value of your house reflects more on your wealth than on your income. It is probably true that when you purchased your house, your wealth was low and your income was growing.

Buying the house added to your wealth and as it grew in value over the years, and as you paid off your mortgage, your wealth increased. Your house was not only your shelter against the elements, but a wise investment. With retirement, your income probably declined, but the value of your house continued to rise. This can result in a number of people with low income or fixed income living in rather expensive houses. (There are also some very wealthy people living in rather inexpensive homes.)

The property tax is not as fair as a tax on income.

Income tax: The best kind of income tax is a graduated or progressive one. As your income goes up, your income tax rate goes up.
Someone earning $100,000.00 per year does not pay at the same rate as someone earning 10,000.00 per year. With a sliding scale of income tax of, say, from 5% to 20%, the poor person would pay $500.00 per year and the rich person would pay $20,000.00 per year. The wealthy person still gets to keep $80,000.00 in income for the year.

I am using a simple plan to illustrate the principle. If both persons were taxed at the same rate of 5% the poor man will give up far more dollars than the rich man. One would pay $500.00 and the other would pay $5,000.00. Who would be under the greater burden? This is a judgement question, but the wealthy tax payer is not going to be hurt that much by a flat tax, and only mildly with a graduated tax. With a graduated rate the state would be able to raise more money than with a flat rate and it would do so with less pain.

Sales tax: Sales taxes are considered regressive taxes because they are assessed at the same rate regardless of the customer’s ability to pay. Low-income people contribute a greater part of their income to sales taxes than do wealthy people. One positive feature of sales taxes is that they are difficult to evade.

Excise tax: Motor vehicle excise taxes are based on the value of the automobile and have a bit of progressivity built into them because of that. Wealthy folks can avoid them by keeping their cars on the road longer. Of course that takes all the fun out of being wealthy!

So where does this leave us? Some taxes are more unfair than others. Progressive income taxes are the fairest of all.

Longmeadow would benefit if the Commonwealth of Massachusetts instituted a progressive income tax. Some individuals in Longmeadow would see their individual income tax bills go up, but others would see their income tax go down. With a graduated tax, the state would be able to raise more money for needed expenditures.

If the state does not adopt a progressive income tax, Longmeadow will have to continue to raise most of its revenue from the property tax and that will require increases in the property tax rate. This increase in the levy limit is what Proposition 2 and ½ is all about. To raise the property tax above a 2 and ½% increase requires an override vote.

Unless the state changes its tax structure, Longmeadow will continue to rely on the property tax to fund local services. We might get some relief if the state government closes a number of tax “loopholes” that enable wealthy corporations to avoid their fair share of the tax burden. Another area to close off is the state’s subsidy of Hollywood by ending the “tax breaks” that we give to film producers shooting films in the state.

If the Commonwealth would agree to take on the costs of fully funding Special Education, that would take a lot of pressure off of local government. We spent $6,694,144.00 on Special Education in FY08. That is roughly 1/5 of the total school budget. An increase in the state income tax rate and/or the state sales tax rate could fully fund Special Education.

With rising energy costs and health insurance costs, perhaps it is time that the Town of Longmeadow had a serious discussion of the whole idea of tax fairness.

I hope these brief remarks will contribute to that discussion.

John J. Fitzgerald