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For Immediate Release: April 14, 2003

Contact: Frank Conte, Communications 617-573-8050; 8750

 

Withholding, consumption taxes discriminate against low income taxpayers, particularly working women and inner city workers.

BOSTON – A new study released today by the Beacon Hill Institute and authored by Cornelius J. Chapman, Jr. calls for the creation of Individual Withholding Accounts (IWAs) that would permit residents of the Commonwealth to earn interest on state taxes withheld from their paychecks.

Because of the withholding feature of federal and state tax law, wage earners, in effect, provide an interest-free loan to government with every paycheck. In contrast, taxpayers with unearned income or who receive their wages in the form of partnership distributions, make estimated tax payments on a quarterly basis and get to hold onto their money until these payments come due. By letting taxpayers put their withheld state taxes into an IWA, the state could remove this discrimination against wage earners. At 2% interest, that would mean that state taxpayers would have an estimated $18.9 million more in their pockets today, tax day.

The study, titled, The New Sumptuary Laws: How Massachusetts Consumption Taxes Keep the Poor Poor, argues that the state could dramatically improve the lot of its poor and bring greater fairness to the tax system by creating IWAs and by reducing or eliminating the sales tax and certain other consumption taxes.

The state·s 5% sales tax, argues Chapman, is akin to the sumptuary taxes of colonial Massachusetts, which sought to discourage upward mobility on the part of the poor. ·Just as the wealthy among the earlier residents of the Commonwealth tried to prevent the poor from becoming rich, today·s sales tax discriminates against low-income taxpayers,· said Chapman. Taxpayers with before-tax incomes less than $30,000 pay more than 2% of their income in sales taxes. Those with before-tax incomes of $70,000 or more pay less than 1% of their income in sales taxes.

The study also takes aim at the state·s automobile excise tax and the sales tax on motor fuel. These taxes discriminate against the inner city poor who increasingly depend on automobiles to find jobs in the suburbs.

Today·s consumption taxes increasingly discriminate, as well, against working women. While groceries are exempt, restaurant meals are taxed at 5%. Working women, especially working mothers, are finding less and less time to dine on tax-exempt groceries and finding it more and more necessary to take their meals in restaurants or at take-out food outlets.

To ensure a more equitable tax system, the study makes four recommendations:

Soften the burden of income tax withholding by creating IWAs. Employers would place withheld funds in an interest-paying account, from which the Commonwealth would draw tax payments on a quarterly basis. Once the worker·s IWA had been debited for its quarterly payment, the worker would get back the unused funds and interest. This would eliminate a feature of current tax law that favors unearned over earned income, and high-income professionals over hourly-wage earners.

Reduce or eliminate the sales tax. The state collected $3.7 billion in FY 2002 from the general sales and use tax, which amounted to 25.8 percent of total state tax revenues. Owing to the regressivity of the sales tax, reducing or eliminating the sales tax would be more beneficial to low-income than to high-income taxpayers. Massachusetts consumers would spend more and would shift their spending from New Hampshire, which currently has no sales tax, to Massachusetts, thus attenuating the loss in revenue to the state.

Reduce the sales tax rate while broadening the base to make it more neutral with respect to different consumer goods and services. For example, the state could help working women by cutting the rate on restaurant meals and take-out foods, even while it broadens the base to include groceries. It could help low-income workers get to their jobs by cutting the rate on currently-tax items, including car tires, while broadening the base to include cable TV and rare coins, for example.

Base the automobile excise tax on the actual price paid rather than on the manufacturer·s list price, and eliminate the sales tax on purchases of used cars. Both measures would make automobile transportation · and the jobs that increasingly require such transportation · more accessible to the working poor.

Cornelius J. Chapman is an attorney in private practice in Boston. He has written widely on public policy issues including education, public transportation, government contracts and sales taxes. He is a published and performed playwright, and is the author of The Year of The Gerbil, a history of the 1978 Red Sox-Yankees pennant race.

 

Revised formatting on 2/24/05 12:07 PM