Question 1: Desperate Measure, Desperate Time

After three hours of testimony against the ballot referendum to abolish the state income tax, the last remaining City Councilors were faced with a Joe the Plummer. His real name was Mark O’Connor, and he introduced himself as a “concerned citizen” from Dorchester. He also said recently lost his job with a structural engineering firm—by his own account, a casualty of the credit crisis.

But, unlike so many community activists, labor leaders, and public officials at a public hearing October 21, O’Connor spoke in favor of abolishing the income tax by voting “Yes” on Question One.

“If it were to pass,” said O’Connor, “it would provide me some relief from the burden of taxation.”

By way of “desperate measures” for desperate times, O’Connor said the councilors opposing a “Yes” vote on Question One should come up with other ways to raise tax revenue and create jobs.

“Cut the red tape out,” he said. “This is ridiculous.” When pressed for a new revenue source, O’Conner suggested wind power.

Long before the hearing ended, 11 councilors had declared opposition to a “yes” vote on Question One. The next day the council would unanimously vote for a resolution calling for a “no” vote.

Before O’Connor had his turn, councilors heard a litany of possible outcomes from a “yes” vote: overcrowded classrooms, a cutback in home care for the elderly, higher fares and deteriorating service on the MBTA, and less access to English language classes for immigrants.

At the same hearing the Chief Financial Officer and Collector-Treasurer for the City of Boston, Lisa Signori, said the effect of a "yes" vote on the local budget would be a shortfall of $300 million, or 16% of total appropriations. She said that would require "significant cuts across the baord."

"We would not be in a position to not impact public safety and not impact public schools," she said.

According to the Boston Municipal Research Bureau, the only way for the city to absorb the revenue loss without cutting schools, police, fire and public works (including related non-discretionary overhead such as health care and pensions)--and still avoid runing over budget--is to eliminate spending for all other departments and services.

"No matter how the City responds to Question 1," says Bureau President Samuel R. Tyler, "the cuts in local aid would fundamentally compromise the City’s ability to provide essential and quality of life services to the residents and businesses it serves."

The ballot question has also given rise to rival studies, with the largest net gains argued by the “yes” vote’s main supporters, the Committee for Small Government. The group says a “yes” will give each taxpayer an average of $3,700 a year, create thousands of jobs, while cutting state revenue by only 26.4%.

The Mass. Taxpayers Foundation (MTF) says the loss of income tax revenue would cut the state budget by about 40% and force even deeper cuts in some areas. As far as total state revenue, MTF says the Committee For Small Government pads the figure by double counting and including off-budget revenue such as state lottery proceeds (more than half of which goes back to prize winners).

While refusing to take a side on the ballot question, the Beacon Hill Institute (BHI) tries to show what might happen if approval of Question One were to play out in a “best case scenario,” that is, being partially offset by increases in revenue from sources such as the property tax and the sales tax.

BHI’s strongest argument in favor of Question One is that eliminating the state income tax would produce a net gain of more than 80,000 jobs. The tax break supposedly would spur more people to enter the workforce, while employers would have more incentive to hire (lower taxes needing less offset from higher wages, and a larger pool of labor driving down cost).

By BHI’s estimate, the “relevant increase” in average annual household income from approval of Question One would be $1,500. How much of this would go to the people sitting on the sidelines of the job market? Even if the figure assumes increases in other taxes, it’s far from clear how many people would jump into the lower end of the job market from lower end of the idle labor pool. If the figure does assume new replacements for revenue, then many people from the lower end could still be disproportionately burdened by an expanded sales tax (including levies on food, electricity, and home heating) and property tax (whether as property owners or as renters).

The BHI factors in a number of cost-savings, starting with state spending on welfare (except for Medicaid) and housing and community development. It’s not clear how much welfare cutbacks would involve people who are employable, or a loss of potential added value (through training, or in connection with child care support) that could be costly in the long term. For example, more public subsidy might be needed for health insurance over the long term if a recipient is trapped longer in low-wage jobs.

Some of the other savings envisioned by BHI are iffy, to say the least. These include repeal of the state’s prevailing wage law (sure to meet with vigorous opposition from organized labor) and the Quinn Bill, which provides higher pay and pension benefits to police officers meeting requirements for higher education. In Boston, access to benefits under the Quinn Bill is guaranteed by contract. As popular as a cutback in those benefits might be for local taxpayers, the police union opposition would most likely be fierce, and any loss of benefits would almost certainly come at a price.

Also unclear under the BHI scenario is the chance of raising property taxes with an override of Proposition 2½. Though Boston’s tax rate (at least for residential property) is relatively low, it may be hard to frame an override as a necessary price for quality. In other communities, override campaigns are often directed at trying to protect quality in a public asset, such as a public school system with strong performance across-the-board. In Boston, where the quality is spotty, and where a smaller percentage of households have children in the public school system, an override campaign based on education might have more trouble.

The analysis for the Greater Boston Chamber of Commerce (COC) is confined to the elimination of the state income tax. Among the many resulting drawbacks cited by the COC is an increase in the cost of borrowing for state projects—including the backlog of road and bridge repairs. The COC says cuts resulting from Question One “could cripple public education at all levels.” And that, according to the COC, would hurt growth in economic sectors that depend on skilled workers: biotech, high tech, financial services, health, and education.

What no study looks at in any systematic way is the effect of a “yes” vote on Question One during a sharp economic downturn. In the best possible scenario, the rough patch would be of short duration. But, while it lasts, it’s hard to envision much in the way of relief from the downturn itself—whether by voting “yes” and cutting taxes, or by voting “no” and maintaining the state’s quality of life and workforce.

In their different ways, the BHI and COC show how the world might adapt—for better or worse—to a new landscape in taxes. What voters are not shown—by either reports or referendum campaigns—is how tax policy can adapt to a world that’s changing dramatically.