Member Resources

Where We Stand
Government: Fiscal Policy

Goal:
A state and local tax structure that will have an equitable impact on taxpayers and adequately support state services with consideration of the effect on the state and local economies; distribution of state aid in a manner that will equalize municipal resources; a comprehensive state budget system that will provide a basis for the evaluation of the cost and effectiveness of current state programs and long-range capital expenditures; up-to-date, uniform and accurate property valuation; and efficient management of the revenue collection systems. (1969-1979, 1992-93)

Tax structure
The League supports:

• The use of certain commonly accepted criteria in judging taxes, particularly equitability, economic effect, flexibility, ease and cost of collection, and adequacy of yield (1967, 1979, 1993)
• A greater reliance on state-collected taxes to reduce the burden on the property tax (1970)
• Enforcement of taxing income-producing properties of tax-exempt institutions (1970)
• An income tax with a graduated rate applied to income from all sources (1970)
• Equal deductions and exemptions for earned and unearned income (enacted, 1967)
• A tax on rental income (enacted, 1971)
• Preferential treatment for long-term capital gains for income tax purposes (1992)
• A capital gains tax that gives preferential treatment to the gain received from the sale of a primary residence (1992)
• An increase in revenue from the sales tax by broadening its base; continued provision for exemption of necessities such as food and medication, and clothing with a lower limit  (1970, 1993)
• The application of "sunset" provisions to sales tax exemptions, for the purpose of providing periodic legislative review as to whether these exemptions reflect the criteria of equitability, economic effect, ease and cost of collections, and adequacy of yield (1993)
• The broadening of the sales tax to include certain non-essential services sold to individuals when taxing those services would meet LWVM criteria and when the greater burden would fall on those most able to pay (1993)
• A modification in the estate tax to provide for a full exemption for the surviving spouse (enacted 1992)
• A modification in the estate tax to increase the level of no-tax status to correspond more closely to the federal exemption, and to make this level subject to periodic review (enacted 1992)
• Increased taxes on liquor and cigarettes (1979)
• User fees (1979)

The League opposes:

• A general sales tax (1970)
• Adoption of new, local non-property taxes by state-wide mandate or local option (1993)
  

League action
When the League developed its fiscal policy positions in the late 1960s and early 1970s, the state relied heavily on property taxes to fund essential municipal services. The League’s principal concerns were that property taxes be reduced by a greater reliance on state taxes, and that the reduction take place in a way in which municipalities with the poorest local tax bases would receive the most aid.

During the late 1970s and 1980s many of the League’s original goals were met. Property taxes have substantially declined as a share of total state and local taxes, while reliance on income and sales taxes has increased. This shift has occurred because of the ceiling imposed on property taxes in 1980 by Proposition 2 1/2 and the subsequent increase in state financial aid to cities and towns, and because of the economic prosperity of the state during the late 1970s and early 1980s, which caused substantial growth in state personal income and sales tax revenues.

Some aspects of the state’s tax system do not meet the League’s criteria of equitability:

• The classification of the income tax, and the flat rates imposed on each class, prevent graduated rates that would better reflect taxpayers’ ability to pay.
• Some sales tax exemptions cause undesirable losses in state tax revenues while granting privileged exemptions to favored individuals and businesses.
• Some cities and towns are not receiving the state aid that their circumstances warrant, principally because of the change to a needs-based formula with high save-harmless floors and minimum per capita increases.

The League has taken action in support of new state taxes because members recognize their responsibilities to provide adequate revenues to pay for the service programs they urge the Legislature to provide.

Based on consensus reached in 1992 on modification to the estate tax, the League was able to take immediate action by supporting legislation that would modify the estate tax in two areas that correspond to the League's new position.

The League supported the new provision for a full marital exemption for the surviving spouse (enacted 1992, became effective July 1, 1994) because it was cost effective, allowed for the retention of the graduated rate structure, and enabled the Legislature to retain its authority over the terms of the tax.

Earmarking Revenues
The League opposes:

• Earmarking specific revenues for specific purposes (1992)

If an earmarking measure were proposed, the League would support:

• That it be statutory instead of constitutional  (1992)
• That it be subject to periodic review  (1992)
• That it be subject to "sunset" provisions that limit the duration of such designation and allow the reversion of the earmarked revenues to the general fund (1992)
  

Tax and spending limits (1980)
The League opposes:

• Constitutional amendments to impose tax and spending limits

The League will evaluate statutory tax and spending limits at the state and local levels by applying the following criteria:

Tax and spending limits should:

• Allow a community to meet its own public service requirements
• Recognize and provide for varying fiscal situations
• Encourage good fiscal planning
• Meet commonly accepted criteria used in judging taxes
• Allow for proper budget procedures

Tax and spending limits should not:

• Be borne unduly by the poor
• Cause detrimental changes in the balance of power between state and local government
• Encourage spending and taxing up to the limit

League Action
Although League members do not favor limits in general, it was agreed that determining criteria by which to judge them gave flexibility to the League. Such action could prevent the adoption, through referendum, of strict limits with potential crippling effects on state and local government. League members oppose setting tax and spending limits through constitutional amendment. The constitution should continue to be a broad framework for legislative action and is not a suitable vehicle through which to set tax or spending limits.

The statute known as Proposition 2 1/2 (1980 ballot) failed to meet League criteria and the League vigorously but unsuccessfully opposed it. Proposition 2 1/2 allows overrides at the local level when funding for local needs is insufficient. Local League boards are encouraged to study any override proposal and determine whether to take a position.

Proposition 2 1/2 limits the property tax levy in two ways: 1) The maximum levy allowed is 2 1/2 percent of the total market value of real and personal property; and 2) the levy cannot increase in any year more than 2 1/2 percent of the previous year’s levy plus an allowance for new growth from new construction or new accounts.

Proposition 2 1/2 also cut the motor vehicle excise rate from $66/1000 value to $25/1000. This caused a significant drop in the second largest local tax revenue account.

In the early 1980s, the Massachusetts economy was healthy and expanding. Increased state tax collections allowed for increases in local aid to offset some of the loss of local tax revenue under Proposition 2 1/2. By the late 1980s state revenue growth had slowed, school enrollment was climbing, the annual inflation rate was at 5 to 6 percent, and the fixed costs of operating municipal government had increased dramatically. State aid, which had been increasing annually, became an uncertain source of local revenue. More communities were faced with the choice of cutting services or trying to override Proposition 2 1/2.

Many local Leagues, concerned by substantial cuts in essential services such as education and fire and police protection, examined override proposals and took action in support of them. Others opted to undertake voter service projects to inform voters about the choices.

The League supported legislation designed to relieve the burden of Proposition 2 1/2 on local governments, such as the proposal to tie the tax limit to the Consumer Price Index rather than the arbitrary and unreasonable 2 1/2 percent.

State mandates (1979)
The League supports:

• Realistic fiscal notes on any enacted legislation that would have an impact on local budgets
• A requirement for a greater-than-majority vote of the Legislature for passage of major unfunded state-mandated programs
• Adequate levels of state funding for state-mandated programs

The League opposes:

• Absolute prohibition of state-mandated programs

League Action
During the League’s 1977-79 Financing Government Study, members examined the issue of state mandates and agreed that, in most cases, the state should not require cities and towns to perform functions that require the use of local tax dollars. Members also agreed, however, that the state has a legitimate interest in setting standards for many areas (education, safety, fire and police, for example) within local administration, and that state mandates are the only way such essential services will be provided throughout the state. Agreement was reached that fiscal notes should be enacted with any legislation that would have an impact on a local budget, that passage of major unfunded state-mandated programs should require a greater-than-majority vote of the Legislature, and that adequate levels of state funding for state-mandated programs should be provided. Proposition 2 1/2 requires full funding of all new state-mandated programs, unless voted by unanimous vote.

Distribution of state aid (1971)
The League supports:

• Distribution of state aid to cities and towns on an equalizing basis for public education and other municipal services
• Continuation of state categorical grants for special programs, with the distribution of such funds on an equalizing basis

League Action
As the League has supported increased state aid to cities and towns to decrease reliance on the property tax, it has, at the same time, supported the concept that all state aid should work towards equalizing the ability of cities and towns to finance schools and other municipal services. Only by such equalizing distributions will the large discrepancies in the ability of cities and towns to raise property tax revenue, and thus adequately support both education and municipal services, be mitigated.

Since the enactment of Proposition 2 1/2, increasing amounts of state aid have been distributed to cities and towns, but the League remains concerned about distribution methods. No single formula has been proposed that meets League criteria. The League believes that state aid should be allocated by two separate formulas that function independently and are funded separately—one for education and another for municipal services. These two formulas would be used to determine all aid for education and for municipal services, not just the new increment that is added each year. Only in this way will state aid serve an equalizing purpose.

For aid to education, the League supported the use of the revised (1978) Ch. 70 formula. Increased state funding up to 50 percent on a statewide average is a goal yet to be reached. The League has filed a bill to make a change in the Ch. 70 formula to invert the fraction local equalized valuation per capita over state equalized valuation per capita. Because this change would give every community some increased aid when funding is increased, the League believes it would help eliminate the need for any save-harmless provision. The change would also make the formula simpler and easier to understand.

In 1971, the League developed the Equalizing Municipal Grant formula, for the distribution of municipal aid. This formula is used by the state to distribute lottery funds. The League would support the use of this formula for the distribution of local aid in conjunction with a revised Ch. 70 formula.

Property tax administration
The League supports:

• A method of levying the property tax to allow different tax burdens on different types of property (classification) with local flexibility within a range established by legislation (1980)
• The use of up-to-date and uniformly accurate property valuations to ensure that state aid distribution formulas and assessments, using local valuations as their base, are fair (1970)
• Strengthened and improved assessment procedures at both the state and local levels of government (1970)
• State publication of an up-to-date manual of assessment guidelines (1970)
• State-established qualification standards for those performing the assessment of property on both the state and local levels (1970)

League Action
Classification: The expected shift in the tax burden as a result of the implementation of the 1974 Sudbury decision, which required all communities to assess all classes of property at 100 percent valuation, led to the passage, in 1978, of the classification amendment. The League could not take a position on the initiative but did hold information meetings.

In 1980, as part of its study on tax limits, League members agreed that different tax burdens could be imposed on different classes of property as long as there was local flexibility. Local Leagues are encouraged to monitor classification hearings and keep the public informed.

Assessment: Because property taxes are based on assessment, local assessment procedures must be fair and equitable. The requirement that cities and towns revalue every three years, in addition to the training and certification of assessors and the efforts of the state Department of Revenue and the State Assessors Association, has advanced the quality of property tax administration. The League supports these programs and cooperative efforts to enable small towns to hire professional assessors, as well as improvements to the equalized valuation procedure by the Department of Revenue and a computer-assisted mass appraisal system at the state level.

State budgetary procedures (1969)
The League supports:

• A comprehensive budget system
• Identification of expenditures in terms of the services to be performed
• evaluation of governmental programs in relation to needs
• Informed action by the Legislature and interested citizen groups
• Long-range planning
• Adequate accounting and auditing systems

League Action
The budget process affects all areas of League concern. The League supports a comprehensive budget system that will provide a continuous evaluation of the costs and effectiveness of state spending programs, and improved methods for judging priorities for operating programs and capital needs. The League worked for passage of legislation requiring an annual tax expenditure budget. This was accomplished by the provisions of Ch. 611 of the Acts of 1983.

Tax expenditures are special provisions in the tax code, such as deductions, credits, incentives or loopholes, or any provision that varies from the normal structure of the tax. They result in a loss of revenue to the state. A tax expenditure budget lists these special provisions for each tax and estimates the amount of revenue lost. It is an extremely useful tool to evaluate tax decisions and policies.

Background

• 1962: Ballot initiative for a constitutional amendment allowing a graduated income tax, strongly supported by LWVM, was defeated by the voters.

• 1962: Opposition to the general sales tax and support of a graduated income tax, LWVM’s two major fiscal policy positions prior to this time, were dropped at convention.

• 1965-67: Public Education study touched on financing of education and aroused member interest in the total financial picture of the Commonwealth.

• 1967: Fiscal Policy study was adopted at Convention.

• 1967-69: Members endorsed criteria for judging taxes, equitability being of prime importance and adopted support for comprehensive budgeting.

• 1969: In the third year of the study, LWVM evaluated the effect of the property tax on individual taxpayers, older cities and the quality of municipal services. Consensus was reached in support of greater reliance on state-collected taxes in order to decrease the burden of the property tax. Consensus was also reached, again, on support of a graduated income tax and opposition to the general sales tax (on food and medicine). Other positions included support for a tax on rental income (enacted in 1971) and support for better enforcement of the property tax on income-producing real estate of tax-exempt institutions.

• 1970: Study of state aid to cities and towns, to learn how the increased revenue resulting from greater use of state taxes should be distributed, resulted in support for equalized funding.

• 1971 Members agreed that reliance on state taxes should increase to reduce reliance on property taxes. LWVM developed a formula, the Equalizing Municipal Grant (EMG) for the distribution of state aid. Although not used for its original purpose, the formula was added to the lottery bill and is used as the distribution formula for that portion of the lottery revenue given to municipalities.

• 1977-79: Financing Government Study reevaluated the Commonwealth’s fiscal policies and their effects on the state economy. Members continued to support more revenue from a graduated income tax, a sales tax with a broader base, and increased liquor, cigarette and gasoline taxes. Members agreed that state-mandated programs neither could nor should be prohibited. Consensus was reached that realistic fiscal notes be required on any bill passed by the Legislature that would have an impact on local budgets.

• 1980: Consensus on tax and spending limits was reached. Members were opposed to amending the constitution to impose tax and spending limits. To maintain some flexibility in regard to statutory limits, however, agreement was reached on criteria by which to evaluate them. Members agreed to support classified property taxes.

• 1991-93: Leagues reporting consensus positions on the estate tax were unanimous in their support of a full exemption for the surviving spouse. It was felt that the current Massachusetts estate tax falls inequitably on middle income surviving spouses whose major asset is often the family residence. The economic and behavioral impacts of the discrepancy between Massachusetts and other states were also seen as undesirable.

There was a strong consensus in support of an increase of no-tax status. Most League specifically recommended an increase to $600,000; a few mentioned a lower level ($350,000-$400,000), "periodic review" or use of an "adjustment factor."

Study of the taxes on capital gains reaffirmed our position supporting the graduated income tax. Most Leagues agreed that if all income were lumped together and taxed at graduated rates, higher income people would pay a higher rate of capital gains than lower income people who also report capital gains. However, the Leagues reporting agreed that preferential treatment should be given to long term capital gains for income tax purposes and to the gain received from the sale of a primary residence.

LWVM supports maintaining the flexibility of revenues by limiting the dedication of specific taxes and fees for specific purposes. The League believes that the Legislature should set program priorities though the budgetary process and that any program worthy of funding should be able to withstand the annual appropriation process.

Members expressed concern about the degree to which the concept of earmarking undermines a thoughtful, deliberative public policy decision process, particularly if it is constitutional rather than statutory. Rather than making the Legislature and executive branch more responsible to public concerns, earmarking may remove them from true accountability for budgetary decisions. The proliferation of dedicated revenues ties legislators to past decisions, jeopardizing funding of emerging needs.

The strongest argument for earmarking is the political one that it may appear to be the only way to raise needed new revenue. However, League members recognized that there is no assurance that new revenues will actually lead to the increased spending desired in the earmarked category, since even earmarked revenues are subject to approbation by the Legislature.

In year two of the study, the Leagues reporting expressed concern that new, local non-property taxes would increase the existing fiscal disparities among the cities and towns. In addition, Leagues were concerned about the difficulties and costs of administering additional local taxes and about the border problems that these taxes could cause.

Local Leagues reaffirmed their support for existing LWVM positions calling for a greater reliance on state-collected taxes to reduce the burdens of the property tax, and for a distribution of state aid to cities and towns in a manner that will equalize municipal resources. Leagues also expressed support for changes in Proposition 2 1/2 that would make this measure more flexible, such as indexing the allowable annual increase to an inflation factor.

In supporting the extension of the sales tax to selected services, League stated that those services that must consumed by people of modest means should not be taxed, while those principally consumed by the wealthy (e.g., entertainment events, landscaping, and decorating) might be acceptable for taxation.

Leagues also expressed concern about the impact of sales taxes on services sold to businesses. They feared that businesses would simply pass the costs of such a tax on to consumers and that the competitiveness of Massachusetts suppliers of services would be lessened. On the other hand, some Leagues expressed interest in a regional (e.g, new England states) approach to sales tax on services sold to businesses as this would keep Massachusetts competitive in New England.

Previous Page: Executive Branch

Back to Where We Stand: Government

Next Page: Home Rule