By James L. Sullivan
Special to the Lowell Sun
The taxation system in the Commonwealth of Massachusetts was originally designed for an agrarian society built on farms and property ownership as a measure of the wealth of the economy and, as the measures of wealth and society grew and prospered and changed, the taxation system evolved into a monstrosity of opportunistic taxes to take advantage of our growing economic prosperity and fund growing demands to serve a modernistic society in its needs for more comprehensive public programs.
The taxation system provided first for property taxes to serve the cities and towns of the Commonwealth in order to provide public education to its inhabitants and provide for police and fire protection, health services, public works, sewer and water services, libraries, school construction, roadway construction, snow plowing, storm drains and all of the services provided by cities and towns today.
The only tax authorized by the Legislature to be levied by all cities and towns to support all these services is the property tax and it is inadequate to do so.
The Legislature then continued to add taxes, fees and licenses and distributed revenue from these sources back to the cities and towns to assist them in providing a growing number of services.
These taxes were meals taxes, corporate excise taxes, state income taxes, excise taxes, sales taxes and others which they reserved to the Commonwealth to distribute as they felt the need. The only problem is that it leaves the municipalities depending on the Legislature to provide for their needs.
The Commonwealth should recognize that a taxation system that developed like Topsy cannot adequately serve the needs of a 21st-century society in which wealth is no longer controlled by property values but by national and international institutions that reflect Wall Street values and bond markets and transcends local, state, national borders, and must contribute to the welfare of society and the citizens that it serves.
With these thoughts in mind, the Commonwealth must try to develop a taxation system that reflects the interdependency of its components to equitably and justly fund the programs that it requires to service its citizenry.
The Bureau of Labor Statistics has established that the total payroll paid by the private sector for the fiscal year 2005 is $139,087,838,000. A 1 percent annual tax on private payrolls could provide about $1.4 billion annually to the Commonwealth.
Some additional thoughts on a 1 percent payroll tax on Massachusetts employers: Based on the estimate from the Bureau of Labor Statistics of the Federal Department of Labor, the tax should generate about $1.4 billion annually.
This should not be considered an additional tax but a major replacement for the outdated and inadequate property tax which cannot adequately support the many programs required to be funded by the property tax.
I believe that at least $1 billion should be cut from the property tax and the payroll tax should be distributed by the Commonwealth of Massachusetts to the cities and towns of the Commonwealth. There can be many formulas utilized in the distribution, but even if we use a simple per capita distribution the figures are significant. If we assume that the population of the Commonwealth is six million people, then the distribution of $1 billion on a per-capita basis would be $230 per capita.
This would mean that a city of 100,000 would receive an annual distribution of $23 million to reduce property taxes and a city like Boston could receive about $120 million. Clearly these figures are not insignificant. In addition, property taxes should be reduced significantly on both residential and commercial and industrial properties.
At the same time, the 1 percent payroll tax would only cost an employer $10,000 for each million dollars of payroll. When we consider the property tax benefit to be received by the companies and their employees, the tax appears reasonable.
For the first time in recent memory, cities and towns could have a 21st century tax in order to support our modern-day institutions. Without having to increase the tax it would grow in proportion to the economic growth of the Commonwealth. A further suggestion with respect to the utilization of the $1 billion generated by the payroll of 1 percent. It is essential that these funds not be used to increase spending by cities and towns.
In the preparation of the tax rate, the cities and towns should not use any of the payroll tax funds in the establishment of the tax rate. The budget should be prepared in the usual manner detailing the appropriations and the estimated receipts, but should not be allowed to use the estimated receipts from the payroll tax. The recapitulation sheet should be prepared for the Department of Revenue in the normal process to establish a tax rate for the upcoming year. When this is done, then the Department of Revenue should apply the portion of the payroll tax applicable to the respective municipality and reduce the tax rate accordingly.
Utilizing the above procedures the Commonwealth could guarantee that the new revenue can only be used to substantially reduce the property taxes of every single city and town in the Commonwealth.
These procedures will not only substantially reduce the onerous property taxes in the Commonwealth, but should also act as a stimulus to the real-estate market throughout the Commonwealth as it should make all real estate, both commercial and residential, more affordable.
We then have shifted our system of taxation to a less regressive and more progressive utilization of a 21st century measure of wealth and prosperity. We have further guaranteed an additional source of revenue to the cities and towns that cannot be utilized to expand spending.
I don't see any downside to broadening our taxation system to enter the 21st century.
Obviously, there is a great need to discuss fully all the implications of this tax, but there can be no denying the fact that to tax shelter at a virtual confiscatory level is counterproductive to the economic growth of the Commonwealth.
James L. Sullivan, of Lowell, was city manager of Lowell for several years during the 1970s.
This article appeared in the Lowell Sun on Sunday, May 31, 2009.