Note: The House’s Local, State & Federal Revenues Task Force held a hearing on April 7. The purpose was to obtain input on how to find additional revenues to address the state’s budget crisis. Dr. Jill Stein presented the following testimony on behalf of MCHC. See end of testimony for links to the two MCHC documents that are the basis of the testimony.
before the Revenue Task Force
State House, Boston
April 7, 2003
Fair Taxes for Healthy Communities:
Proposed Budget Cuts Are Unwise, Unfair and Unnecessary
Good afternoon. My name is Jill Stein. I’m here as a practicing physician, and as president of the Massachusetts Coalition for Healthy communities, a nonpartisan organization working to improve the many dimensions of health in our communities – which we believe includes the medical, economic, social, environmental, and political areas.
I’m here to respectfully urge the members of this committee to raise revenues to close our budget shortfall, and to do so fairly, without a general tax increase that would worsen the disproportionate tax burden our system now places on moderate and low income tax payers. Instead, I would urge you to close the revenue gap by asking those who can most afford it to contribute their fair share.
I will address primarily the question of how to raise adequate revenue fairly. First, however, I want to underscore that the massive cuts required in the absence of revenue increase – are unwise, unfair, and unnecessary.
THE CUTS ARE UNWISE
These cuts are unwise because they are not just mere belt tightening, but represent devastating cuts to essential services, especially in light of major cuts in health and human services already imposed over past several years.
Why are cuts to essential services unwise? Because fiscal responsibility is inseparable from social responsibility. If tax cuts were the key to a flourishing economy, then Mississippi, Louisiana, or Uganda ought to be the leading world economic centers. Obviously, a good economy requires a public infrastructure, including schools, police, fire fighters, and social and financial institutions that maintain our social fabric and the public’s trust.
Homeless families on the streets, an undereducated workforce, a sick environment and a humanitarian crisis of our own – these are not just problems for people, they are also problems for the economy, and will preclude establishing a good climate for business. On the other hand, having the best educated, healthiest work force and a safe environment, create not just healthy people and healthy communities, but a thriving economy as well. This has always been true for Massachusetts and we must preserve and improve the excellence of our workforce.
The cuts to Medicaid are a case study in the unwise nature of the budget cuts, which not only violate our values and commitment to a healthy society, they are also fiscally unsound. Cutting 50,000 long term unemployed adults out of Medicaid supposedly saves $200 million. But that $200 million comes directly out of the health care economy, where it is a source of jobs. And half of that $200 million was coming from the federal government.
So this supposed “savings” costs us $100 million right at the outset. Added to that are downstream consequences – the cost of emergency room care for those who will not receive more timely, outpatient care in a setting where it is far more affordable. Since state support for uncompensated hospital care is also being cut, this added burden may well be the straw that breaks the back of more hospitals. This will not only aggravate the critical shortage of health care facilities, especially emergency rooms, it will cause further loss of jobs in our health care sector.
The cost inflation in Medicaid is small relative to the cost inflation in the private health insurance sector. Problems endemic to the entire health care system are not solved by pulling the safety net out from under those who need it. Do we need to change the system? Yes, but rising costs in the entire health care sector should be addressed by real reorganization such as
o More effective bulk purchasing of pharmaceuticals
o Providing a home care option for seniors needing chronic care
o And drug abuse prevention
These measures could markedly reduce three of the four biggest drivers in the growing cost of Medicaid.
In addition, streamlining health insurance in general, through a single payer system of health insurance, would markedly benefit the entire health care system by reducing the health insurance bureaucracy that drains 40% of health care dollars into red tape and paper-pushing.
So indeed reforms are called for, but they should be real reforms that improve the efficiency and efficacy of the health care system. Measures that simply deny essential services while preserving a wasteful insurance bureaucracy and pharmaceutical industry profiteering are not the kind of reforms we need.
THE CUTS ARE UNFAIR
In addition to being unwise, cutting essential services is also unfair. They are unfair because those who need them most will be most harmed. Quality education, for example, is essential for our economic security. The threatened budget cuts undermine schools in communities that are most need of local aid. These cuts – added to cuts to public higher education – also deny students from low income families access to education, advancement and the American dream.
They are also unfair because the tax cuts of the past decade were given predominantly to the top of the income spectrum. And now those who didn’t get the benefit of those tax cuts, have to bear the burden of the program cuts caused by inadequate revenues resulting from those tax give-aways. Increasing revenues through fees as proposed in the Romney budget will compound the disproportionate burden already born by lower and moderate income taxpayers.
Not only were the tax cuts unfair, but the distribution of entire tax burden itself is unfair. After all loopholes and exemptions are considered, the lower 40 per cent of tax payers in fact are paying twice as much as the wealthiest 1% in state and local taxes. This disparity in tax contributions is itself superimposed on a vast disparity in the distribution of wealth, in which the richest 1% now owns 38% of household wealth, and the richest 20% own a disturbing 83% of household wealth. The fact that such disparities have markedly increased in recent years is cause for all the more concern.
THE CUTS ARE UNNECESSARY
Finally, the budget cuts are unnecessary. There are a variety of revenue measures that can restore needed revenues while increasing tax fairness and protecting most taxpayers from increased taxes and fees.
First, a word about disclosure as a principle that is critical for fair revenue reform. Adequate public debate is essential for democratic decision making. Thus it is disturbing that new House rules (H.R. 3730) have foreclosed meaningful public discussion by reducing debate on this critical and complex subject to one terribly-inadequate single-day of discussion. The Massachusetts Coalition for Healthy Communities urges the legislature to repeal these new rules and engage a full and fair debate of this critical subject.
In the interests of disclosure, we also propose as a top priority revenue measure, that a tax incidence study be required in this and any proposed new revenue package. A tax incidence study clarifies how the burden of taxes and fees is distributed across the income spectrum so the impact of proposed revenue measures can be fully understood by both the legislature and the public.
Tax incidence studies are used in several states, including Maine, Minnesota, and Texas, where they are performed every two years or whenever significant changes to the tax system are considered. Massachusetts taxpayers are no less deserving of full disclosure on how the revenue burden adds up.
The key provision for raising needed revenues fairly is leveling the bottom line revenue contributions across the income spectrum An equitable contribution was defined for centuries – in the form of the tithe given to church – as a percent of income or wealth. Currently the Massachusetts tax burden is distributed in a very unfair fashion, with the lower 40% of tax payers contributing twice as much (9.2%) as the richest 1% (4.6%) in all state and local taxes, after all deductions are considered.
Preliminary analysis that we have conducted suggests that leveling these contributions to the same rate of 8.2%, would create a tax cut for the lower 60% of taxpayers, while the next 20% would contribute at the same rate they are currently paying. While the contribution for the top 20% would increase, they would still pay a lower rate than lower income taxpayers have been paying for past 10 years. This simple step toward fairness would generate an additional $2 billion, which, combined with one-time measures, would eliminate the bulk of the FY04 shortfall.
A FAIR TAX PACKAGE
How do we change the tax system in order to implement a fairness principle? We have assembled what we call a “Fair Tax Package” that can serve as a point of departure for moving towards adequate revenues for which the burden is equitably distributed across the income spectrum. This package is intended to complement other fair tax reforms such as a variety of other corporate loophole closures proposed by some members of the Legislature and other organizations. In describing our reform package, let me say that our purpose is not to insist that our particular package be adopted, but to initiate the discussion and adoption of a suitable package of fair tax reforms. Our proposals are means to those ends. We are not wedded to any particular revenue initiative, but rather to the goal of fair and adequate revenues.
The “Fair Tax Package” includes three types of revenue reforms.
Fairness Taxes are intended to achieve a more equitable distribution of tax contributions. Proposed fairness taxes include:
* The repeal of the sales tax exemption on selected services that are used primarily by corporations and wealthier households. This would include services such as lobbying, legal and accounting services, business consulting, public relations and financial management. This would be expected to generate over $500 million in annual revenues.
* An intangible property tax applied to the ownership of stocks, bonds, and other instruments of wealth that exceed a proposed deductible threshold of $30,000. At a rate of $2 per $1000, this would generate approximately $500 million annually. The intangible property tax is currently in use in Florida and Kentucky, and is being seriously considered in Washington. Since over 86% of the value of stocks and bonds his held by the wealthiest 10% of taxpayers, this measure will help restore fairness.
* An increase in the income tax rate along with an increase in personal and rental deductions and the earned income tax credit. Such measures could be used to prevent additional taxes from being imposed on low and moderate income taxpayers who are already paying more than their fair share. Increasing the rate from 5.3 to 5.6%, and the personal exemption from $3300 to 4000 would generate an additional $265 million.
* Repeal of the real estate sales tax exemption for commercial real estate and residential properties in the high end of the real estate market. A transfer tax of 5% on the highest 25% of real estate value sold in Massachusetts (amounting to about $40 billion in sales annually) would produce approximately $500 million in annual revenues.
The second type of revenue measures in the Fair Tax Package are Loophole Closures that repeal corporate loopholes or other special treatments. These include:
o Repealing the Raytheon and Fidelity Single Sales factor tax breaks, expected to yield an additional $220 million annually.
o A “combined reporting” requirement that makes it difficult for corporations to hide income. The Mass. Budget and Policy Center estimated this would produce an additional $75 – 195 million in FY04 revenues.
The third type of revenue measures contained in the Fair Tax Package are Smart Taxes, revenues that create incentives for safer and more efficient patterns of consumption and production.
o These would include a tax on pollution, including carcinogens, toxins listed under TURA, and modeled non-TURA compounds. If these were taxed at a rate of 15 to 30 cents per pound, they would yield over $291 million per year. Pollution taxes create incentives for cleaner production and consumption. They also compensate the government for the damage to health and the environment, and for the costs of inspections and clean-ups.
Further details on these and other fair tax initiatives can be found in the Massachusetts Coalition for Healthy Communities tax policy documents or on our website, www.masschc.org. I would be happy to ask members of our Tax Policy Working Group provide you with further details.
The Massachusetts Coalition for Healthy Communities looks forward to working with you to ensure a more equitable and adequate system that will secure the revenues needed to maintain the essential services of the Commonwealth. We must not abandon the commitments that we have made to education, to our senior citizens, to our disadvantaged communities, to our environment, and to the people of the Commonwealth. I know that you do not wish to do so, and we believe that you must not do so. These are extraordinary times, and they call for a willingness to step away from business as usual and implement real solutions to our fiscal crisis. Thank you for your consideration.
Tax Fairness: A Real Solution to the Budget Crisis, Publication A01, Massachusetts Coalition for Healthy Communities
Better Ways to Fund Vital Services, Publication A02.1, Massachusetts Coalition for Healthy Communities