Time to axe the tax?: The small government act

Published 17 years ago -  - 17y ago 34

Politically, Massachusetts and New Hampshire are as different as two bordering states can possibly be. New Hampshire is a predominantly Republican enclave in the Northeast, the only New England state to vote for George W. Bush in 2000. Massachusetts is a Democratic stronghold known for electing such staunch liberals as Ted Kennedy and Michael Dukakis.

The Live Free or Die State is a bastion of anti-tax sentiment, while its neighbor to the south is frequently labeled “Taxachusetts.” Yet some are working towards a role reversal between these two states.

This November, Bay State voters will have the opportunity to vote on Question 1, a referendum to abolish the state income tax. Opposed by the leaders of both major parties, this drive is being spearheaded by the Massachusetts Libertarian Party and its feisty gubernatorial candidate Carla Howell. Howell has done surprisingly well in statewide campaigns during the last two election cycles, running on a platform proclaiming “small government is beautiful.” Her initiative to abolish the income tax is otherwise known as the Small Government Act.

By contrast, New Hampshire currently has no state income tax but Democratic gubernatorial candidate Mark Fernald is campaigning to change that. He argues that the Granite State will be unable to provide equitable funding for public schools without one. Democratic candidates for governor have unsuccessfully advocated the adoption of an income tax before, most recently during Arnie Arnesen’s failed bid in 1992. But the Democrats have gained strength as New Hampshire’s party politics have become more competitive and the number of unaffiliated voters has grown. Democrat Jeanne Shaheen, now running in a close race for U.S. Senate, is the incumbent governor who beat the fervently anti-tax conservative former Sen. Gordon Humphrey to win reelection two years ago.

Both movements are still swimming against the political tide in their respective states. “Axe the Tax” has long been a strong rallying cry with New Hampshire voters while many policymakers in Massachusetts are considering new taxes to bolster sagging revenues rather than deep tax cuts. Indeed, some legislators are working to delay or reverse the gradual rollback of Massachusetts’ income tax rate from 5.95 percent to 5 percent approved by the voters in 2000. Yet the forces for tax policy change continue to make their arguments vigorously.

Howell and her supporters argue that even under Republican governors, Massachusetts state government spending has more than doubled in nominal terms over the last ten years and has grown faster than the rate of inflation. The Small Government Act would cut off a large enough part of their revenue supply to force spending restraint. Proponents contend that 3 million taxpayers would reap a $3,000 windfall each and in the process create 300,000 to 500,000 new jobs. All this while still being able to afford a state budget $4 billion larger than the last one passed during the Dukakis administration.

Fernald is also selling his plan to create a state income tax as relief for New Hampshire taxpayers – from onerous property taxes. His website features an “Axe the Property Tax Calculator” that allows visitors to input their incomes and home values to learn how much money they would save if education were funded by an income tax instead of property taxes. But Manchester Union-Leader senior political reporter John DiStaso shows how this could be misleading: “The assumption is that every penny of $400 million in new education dollars Fernald would raise and distribute to cities and towns will be used by local governing bodies to reduce property taxes. The assumption is that no new dollars are spent on textbooks, equipment, programs or staff hirings or raises.”

It is not clear either from a 1997 state Supreme Court ruling or Fernald’s own proposed education mandates, which would include requiring kindergarten in 19 communities where it is not currently mandatory, that this assumption is tenable.

Realistically, neither state is likely to change whether they have an income tax this year. Fernald is trailing anti-income tax Republican Craig Benson and Massachusetts’ Small Government Act stood at 34 percent in the most recent poll. Even if the Small Government Act were to pass, the 2-to-1 Democratic legislature would surely exercise its prerogative to promptly repeal it; a Gov. Fernald would face similar problems convincing a Republican legislature to go along with his income-tax plan.

Nevertheless, these two very different New England debates represent a larger argument over state fiscal policy – the reliance on higher taxes to fund public programs versus lower taxes to allow growth in the private sector. The most recent installment of the Cato Institute’s biennial Governor’s Report Card contained a comparison of the economic performance of states that raise taxes with states that cut them. The ten states that cut taxes the most between 1990 and 2000 saw personal income grow 74 percent compared to 57 percent in the states that raised taxes the most. The tax-cutting states on average experienced 25 percent job growth compared to only 9 percent in the tax-raising states. The tax-cutting states had higher bond ratings and lower unemployment rates than the tax-raising states.

Part of the genius of American federalism is that it allows us to see the wisdom or folly of different policy approaches as tested in various state “laboratories.” States will continue to differ widely in their fiscal policies, and if the past is a reliable guide states with lower taxes and less government will continue to see more jobs and growth than states that try to tax and spend their way to prosperity.

Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact.”

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