Massachusetts could lose its largest revenue stream if voters in November approve an initiative to eliminate the state's income tax, which brings in roughly $12.5 billion to the commonwealth's coffers.
The issue received more than the required signatures to make it onto the ballot in the upcoming general election. Yet, if the question passes and becomes law, legislators or Gov. Deval Patrick will have the opportunity to file new legislation to change or amend the initiative. Still, state officials do not welcome the prospect of losing a funding stream that accounts for roughly 40% of the commonwealth's total budgeted revenues.
"It's their largest revenue source by far," said Nicole Johnson, an analyst at Moody's Investors Service. "There's some history of the income-tax rate reductions being approved and then the legislature has not implemented that, so they have some precedent there. But, in terms of losing the whole income tax, without a replacement, it would be a huge hit to their budget."
The issue could see enough support at the voting booth. In 2002, 45% of voters approved a previous attempt to terminate the flat 5.3% state-income tax in Massachusetts. While the initiative did not gain a simple majority, the sizeable push to eliminate the tax indicated that the issue was popular among voters. This time around, experts say there may be an even larger percentage of voters who want to end that revenue source for the state.
According to Michael Widmer, president of the Massachusetts Taxpayers Foundation, the initiative could pass as voters will be heading to the polls in the midst of rising gas and food prices along with other strains on personal finances and growing skepticism on how governments spend taxpayer dollars.
"They see their 401ks declining and job pressures in terms of layoffs and so forth," Widmer said. "So it's a time of high anxiety and I think from the point of view of the proponents it's a perfect time to have this on the ballot. And if you think about it, they would have just paid their first tank of heating oil for the winter in October and they will have just paid their first property tax bill on Nov. 1."
Massachusetts' fiscal 2009 operating budget, which began July 1, totals $28.2 billion, which officials expect to partially support with an estimated $12.5 billion of state income tax revenues. The commonwealth received the same amount of income tax revenues last year. In fiscal 2008, income-tax revenue accounted for nearly 60% of the state's total tax revenues.
"It's really beyond comprehension that we might have to deal with this because the impact would be so dramatic, but we might," Widmer said. "Obviously the public climate is very sore with all the pressures that families are feeling, for all the obvious reasons."
Yet supporters of the initiative to end income tax in the Bay State believe that having fewer funds within state government forces officials and lawmakers to use the money in a more efficient manner as the state would need to justify every expenditure. That in turn could decrease the opportunity for misuse of funds and fiscal corruption.
"Open the books so that spending can be scrutinized to the tax payers," said Carla Howell, a leading member of the Center for Small Government, the group that helped obtain signatures and draft the initiative's petition.
"It's their money. They can look and see if that spending was a good deal, a bad deal. Was it overpriced? Were we overspending? Were they giving out sweetheart deals? Were they wasting it? And what results did it produce? Was the program really worth the money at all, maybe it should be scrapped? Maybe it's redundant with another agency. You hear stories of this all the time in government. There's two agencies or four or eight doing the exact same thing. Maybe we can eliminate a bunch of them and only leave one that's actually doing the job. That's the kind of thing we'll discover when we open the books."
In the past, Massachusetts residents have supported measures to restrict government taxation. In 1980, lawmakers enacted Proposition 2 1/2, which restricts property tax revenues from exceeding 2.5% of a community's assessed value and limits property tax revenue growth by 2.5% in any given year.
Whether the state works more efficiently with less money or not, Standard & Poor's analyst Karl Jacob said such a considerable change to Massachusetts' revenue stream would be an immediate issue for the state.
"It's still premature to speculate on how they would have to change what their revenue options would be," Jacob said. "I don't know, it's such a significant number to address. It's not like its reducing the income tax from 5.3% to 5.2%, it's eliminating it. So, it really would be breaking new ground in terms of how to finance government in Massachusetts because it's such a large number."
State officials have yet to announce substitute plans in event of the elimination of the state income tax.
"It's definitely a scary prospect. I don't think that we're there yet in terms of alternatives," said Cyndi Roy, a spokeswoman for the governor. "I think we're hoping and I think the governor plans to work against the ballot question."