MA Question 3 - Should we roll back the sales tax? A detailed analysis.

Time to get down and look at the details of the most important ballot question this November.  Let us see why the Boston Herald endorsed this ballot initiative and why the National Taxpayer Union is featuring Question 3 on their 2010 ballot guide.

Background 

Deval Patrick and Beacon Hill realized that they were looking at critical budget shortfalls and responded by raising several taxes upon the citizens of Massachusetts.  One of which was to raise the sales tax from 5% to 6.25%.  

This move was especially hurtful in light of the failed Question 1 ballot initiative from 2008 which proposed to cut the MA Income Tax from 5.3% to 0.   With power of 7 million dollars from the Teacher Unions the Question 1 initiative lost badly.  Not only was the Obama wave a bad time for such a question, but the Center for Small Government was outspent by a magnitude of 35 to 1.  An opportunity for MA citizens to have their taxes reduced outside of Beacon Hill rests largely on the shoulders of Carla Howell and her volunteers comprising of regular everyday citizens.   A story of David vs. Goliath when you factor the amount of money and effort it takes to get a ballot initiative approved and the power and might of the opposing teacher unions. So it becomes our duty to give every ballot initiative an honest and careful examination.

Question 3

The purpose of this analysis is not to rehash talking points that can be found on the main Question 3 website, RollBackTaxes and the opposition website VotenoOnQuestion3. The point is to cut through the propaganda from both sides and get as many facts on the table as possible before ADD kicks in.  Because these ballot initiatives become law and have to be immediately implemented, it is your duty as a voting citizen to carefully consider your vote!  Let us by addressing some of the popular questions first.

What are the benefits?

More money for you:   Common sense, history and BHI tell us that MA will experience tens of thousands of new jobs.  Furthermore, by no longer having to hand over private money to the state government citizens can choose to spend hundreds of dollars as they see fit.  Some estimates suggest 33,000 new jobs and over 500 dollars in your pocket - however treat all such linear statistical analysis with skepticism.  Ultimately the numbers are meaningless because they can never properly consider behavioral changes.  This is why when government projects a certain amount of revenue from tax hikes it often happens that revenues fail to meet expectations due to changes in human action that linear models can never predict.  We know jobs will be created, but focusing on absolute numbers for the sake of analysis is a distraction.

Less money for Beacon Hill: Milton Friedman wrote about this next common sense point decades ago.  The most efficient way to spend money is by the individual who owns this money.  Conversely, the most inefficient way to spend is to spend someone else's money on someone else.   Following?  So our government is the most inefficient spender of our money and controlling the flow is critical to our well being.

Smaller government:  By cutting revenues, we force Beacon Hill to shrink government.  Whether it be reducing staff, reducing salaries, reducing departments, it really does not matter - because a smaller government means more efficiency, less waste and less fraud, not to mention more cash for us.

What are the consequences? 

Smaller government:  Yes, a smaller government does have consequences.  As people continue to elect politicians who make promises, these promises must be maintained.  Just like the problems we are experiencing with Social Security and Medicare, the MA government has people dependent on essential services.  A reduction in revenue and a reduction in the size of government could potentially compromise these promises.  However this theme gets rehashed every single time a tax cut is proposed as a Boston.com writer accurately points out. 

Other issues?

Implementation:  I would like to bring this up and address this point quickly.  There have been claims made that even if this ballot imitative passes then Beacon Hill will not implement this.  First of all, if this was the case then why is so much money being spent on trying to oppose this?  Why did teacher unions spend over 7 million dollars in 2008 to block something that would never be implemented?  Silly, right?  Furthermore, over the past 30 years there have been dozens of ballot questions that were voted on and are still law today.   

The meat and potatoes, can Massachusetts afford a 3% sales tax?

Let us cut to the main point, shall we?  Even I am starting to doze off here.  The issue boils down to this:    Our state is already experiencing budget shortfalls, can we really afford to deprive another 2.5 billion?  Furthermore, if we do indeed deprive the state government of this 2.5 billion then services that people need most will be cut.   Ok, let us take a look!

Let us first establish how much MA spends.  I invite you to explore the 2009 CAFR report to verify all my numbers, but as of 2009 MA has spent:  49.4 billion dollars.  This means that rolling back 2.5 billion in spending will force a 5% reduction in spending.

Note:  Opposition groups claim the budget is substantially less, but this appears to be semantics designed to make the cut look more dramatic than it really is.  

Next, let us figure out how spending looks as a trend. Page 167 of the CAFR report has enough numbers to make you dizzy, so I threw together a simple visual representation with some of the major spending sections.   For the sake of comparison, I have also plotted the median income for Massachusetts.

There are several things I would like to point out here.  First the total spending includes medicaid, hhs, etc.  I just stacked them together as a visual representation.   The 2005 spending is an odd aberration due to education spending for that year.  For reasons unknown to me 8 billion was spent on education that year, well outside the average of roughly 2 billion.  The data for the median income can be found at MassBudget and includes both private and public jobs. 

The idea that Beacon Hill and our governor are doing everything they can to curb spending is difficult to accept.  Spending has gone up without a hitch since 2002, it has gone up since the 90s too, but the 2009 CAFR report only goes back to 2002 and I was too lazy to dig up older data.   Worse yet, in the face of a recession that has started in 2007 spending climbed by almost 20%!!  Have your personal expenses gone up by 20% or were you forced to cut by realities of life?  

Equally important is the income.  It has remained virtually flat, yet our government is continuing to demand more and more from us.  This is not only unfair, but it is economically unsustainable, because a government can only take so much from the productive sector before the sector starts to collapse from the distribution mechanism.  I am not being overly dramatic when I tell you that my parents left the Soviet Union for precisely that reason, virtually everything was taken from the private paycheck in order to pay for government spending.

If Question 3 passes, will services be cut?

This is the major question that everyone wants an answer to.  Before we attempt to answer it, how much money did MA spend on local aid?   According to page 167 of CAFR, total local aid was:  5.2 Billion dollars (Curiously enough, it was exactly 5.2 billion in 2002 as well!).  In 2009 MA spent 10% of it's total spending on local aid, a dramatic decrease from 2002 where it spent just over 15%.

The sales tax along with every other tax in MA is grouped and pooled into a general revenue pool, so there is absolutely nothing that ties sales tax revenues to local aid.  In fact, according to the CAFR (page 170), in 2009 MA has received 18.3 Billion in revenue, a fraction of the 49 billion it spends.  There is, however one troubling statement that may explain why services *could* be on the chopping block.

"Medicaid represents 26% of all the Commonwealth’s governmental expenses, exclusive of business – type activities. However, it must be noted that because of ARRA, more than half of the Medicaid expenses are subsidized in the form of federal reimbursements. These subsidies are noted herein in the “operating grants and contributions” segment. The largest expense that is not subsidized by program revenues is direct local aid to the municipalities of the Commonwealth."

Note that ARRA stands for the American Recovery Act, also known as the Obama Stimulus.  What happens when ARRA funds run out is anyone's guess, but I digress.  The point of that blurb is that local aid is the most direct burden on the state because it has no direct help or subsidies that come directly from the Federal Government.   This statement is consistent with major spending levels:  Elementary education (3.2 billion), Unemployment compensation (3.7 billion),  General Government (2.6 billion),  Public Safety (2.5 billion), Umass (2.4 billion).  (HHS is the only group that spends more (over 7 billion), but logic dictates that Federal funds are at play.)

Yet this really fails to answer the question, why.   After all, as the bar graph above suggests tremendous increases in spending have gone up across all government levels except local aid (and transportation)!!   So why must the one thing that remained static for the past 8 years be cut, while explosions in spending remain unchecked?

The best analogy I have is this:  Imagine a fat reckless spender who lives paycheck to paycheck and has been buying more and more goods as his salary grew and grew.  He enjoys fancy cakes, shiny jewelery, buying new cars every year, fine Italian shoes and sporty Armani suits.  This makes the baker, the jeweler, mechanic, shoemaker and tailor very happy.  Suddenly his employer faced with economic hardship threatens to reduce the man's salary by 5%.  The employer gets a phone call from the utility company with the following request: "You can't cut this man's salary, because he will no longer pay the electricity bill".

Sounds insane?  Welcome to politics.

Except that the opposition to Question 3 is the utility company and every other government agency represents the baker, jeweler, mechanic, shoemaker and tailor.  Why can't the reckless spender buy less cakes, buy less jewelery, stop buying new cars and clothing?   Of course he can and our government can and should reduce spending levels.  Even if we go back to 2008 spending levels we can safely roll back the sales tax!   Interestingly enough, we can cut away the income tax (12 billion) if we just go back to 2004 spending levels!  

The biggest offender, Medicaid.  

Medicaid as you can see, represents the biggest increase in both absolute and percentage terms.  Almost a 100% increase and a quarter of the overall spending.   Yet looking under the cover, one observes a strange trend in Medicaid costs:

What  you are seeing here is a 150% rise in Medicaid costs versus a 20% increase in case load increase!   These are staggering costs.  This is precisely why we so badly need reform, but instead we are getting reform that seems to foist more Medicaid on us instead of less!

One possible explanation in Medicaid costs is the overall increase in health care costs:

Some quick math here (using real GDP):

In the year 2000 our GDP was 10 Trillion.  Medical costs were 14% of 10T = 1.4 Trillion.   

In the year 2006 our GDP was 13 Trillion.  Medical costs were 16% of 13T = 2.08 Trillion

That represents almost a 50% jump in costs, a staggering and depressing number.  Yet at the same time in MA, costs went from 4 billion to just over 8 billion, a 100% increase!   

The Medicaid expenditures in MA are virtually double that of medical costs, so this leaves fraud and waste as the only explanation.  Medicaid costs should only rise as fast as health care costs, so virtually half of the expenses are flushed down the proverbial toilet.  In real terms, 5 billion was squandered in 2009 alone!   

An easy proposal.

If we reduce the following by 10%, we can roll back the sales tax without giving up one penny to local aid.

Medicaid:  1 billion 

HHS: 750 million

General Government: 260 million 

Housing and economic development: 100 million 

Umass: 240 million

Judiciary:  110 million

Oddly enough, this would bring the spending level of all those agencies to 2008 levels!  However I think it is best we leave this task to our legislators, after all, it is their job, no?

Conclusion:

I hope after reading this you have more information and more insight into Question 3.  Although the information is often obfuscated, everything that a citizen needs is made available by the MA state government and it suggests that spending levels have spiraled out of control. Your task is to curtail this spending and send a message to Beacon Hill that the citizens of this great state will not allow the politicians to use our income as their personal piggy banks.   The idea that any spending can be performed with the knowledge that we could be taxed later is abhorrent and is the antithesis of what makes this country so very great.  

Examining the inner workings of our financial system, even at this superficial level exposes many interesting dilemmas.  Not only do we see spending across all levels of government rise faster than personal incomes, but the relationship between Federal and State, State and Local and circulation of funds is disturbing.  The tangled web of dependencies provides for a messy political climate that breeds favoritism, pork, special interests and steep administrative costs.  

We as citizens should push for a greater separation between the various government levels while always pushing for a stronger and bigger local government.  Ideally we should have a State government with less influence over local politics and Local governments more self sufficient.  I would personally love to see an elimination of the 5.2 billion from State expenditures for local aid in lieu of higher local taxes and lower State taxes.  Similarly we should see a reduction of federal aid to states and a corresponding reduction of federal taxation in lieu of state taxation.  This will create leaner, more efficient and more responsive local governments while reducing waste and leaving more money in the pockets of productive everyday citizens.

Update:  A look at the growth of MA Salaries can be found here.

Please make any suggestions, comments and corrections in the comment section.