A preliminary draft report issued by the Massachusetts Tax ExpenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. Commission shows that state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. expenditures are expected to reach $26 billion in 2013, a number $4 billion larger than the projected revenues of $22 billion. In short, as the Massachusetts Department of Revenue put it, “the Commonwealth collects less in revenue than it has chosen to forgo.”
The Massachusetts General Laws define tax expenditures as state tax revenues lost as a direct result of exemptions and deductions from, or credits against, taxes. These carve-outs are not very different from direct government expenditures, but unlike many direct expenditures which are downward redistribution, tax expenditures often represent upward redistribution. They create an unlevel playing field where well-connected industries gain special tax treatment.
According to currently compiled data for the Commission, Massachusetts’ tax expenditures to tax revenues ratio is the highest in the country:
Tax Expenditures and Tax Revenues by State
|State||Fiscal Year||Total Tax Expenditures (Millions)||Total Revenue (Millions)||Expenditure/ Revenue Ratio|
The Commission unanimously approved a Statement of Principles on February 6 making it clear that tax expenditures should face regular scrutiny and cost-benefit analysis by Executive and Legislative branches. This type of cost-benefit analysis is usually applied to things like regulatory decisions, but is often not required to justify tax expenditures.
Often tax expenditures incur a large cost on tax payers without generating the desired returns. As we noted in a November 2011 blog post, the Massachusetts Department of Revenue found that the state’s film tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. program had high costs with minimal benefits. In Massachusetts $14.6 million in tax credits were given to filmmakers in 2010, yet the film tax incentive program only generated $800,000 in new state revenues.
The Secretary of Administration and Finance Jay Gonzalez recently made a proposal to the Commission that attempts to put a few quality control measures on Massachusetts’ overflowing expenditure problem. His plan calls for eight tax credits to sunset after 5 years, and requires that many expenditure programs, including sales exemptions on food and clothing, be vetted for effectiveness every 5 to 10 years.
By implementing stronger oversight of tax expenditures, Massachusetts can start more directly honoring the principles of simplicity, neutrality, and broad bases with low rates.
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