Panel to urge fewer tax breaks
Says exemptions cost state billions; others dispute impact on coffers
A group of state leaders has concluded that Massachusetts needs to overhaul its tax system to eliminate many breaks that siphon billions of dollars from public coffers, setting the stage for a debate over how the state should encourage economic growth.
A task force of elected officials and policy makers, known as the Tax Expenditure Commission, plans to call on Governor Deval Patrick and the Legislature to reduce the number and amount of tax exemptions the state offers, according to a preliminary outline of its report. The final report is scheduled to be released by the end of next month.
Commission members have not finalized the details, but several said the report probably would not identify specific tax breaks to be eliminated, leaving that for the Patrick administration and lawmakers to decide.
The Department of Revenue recently found that Massachusetts has roughly 200 tax credits, deductions, and exemptions, covering things like funeral items and cement mixers and costing the state more than $26 billion in revenue a year - or $4 billion more than it collects. In most cases, a tax deduction or credit allows taxpayers to pay less in state taxes than they otherwise would.
“There’s a suspicion that we’ve got too many’’ exemptions, said Jay Gonzalez, the state’s secretary of administration and finance, who chairs the task force. “The exception exceeds the rule.’’
Supporters of tax breaks, which often target particular industries, argue they can attract businesses, encourage expansion, and create jobs. Typically, economists favor simpler tax systems with fewer special provisions and lower rates as more efficient and less likely to encourage people to contort their behavior to take advantage of a deduction.
“If you have a system with lots of tax deductions, people are going to waste a lot of time and effort trying to fit into those special provisions,’’ said Mark Robyn, an economist with the Tax Foundation in Washington.
But some observers say Massachusetts has far fewer tax breaks than it seems at first glance. Some are common deductions that most taxpayers take for granted, such as the standard deduction for individuals or couples on annual income tax returns.
Sales tax exemptions for real estate transactions and most services, such as Internet access or legal help, account for about half of the $26 billion the state forgoes through various tax breaks. There is another $1 billion in sales tax exemptions for liquor, fuel, and hotel rooms, because they are typically covered by taxes specific to those things.
“The idea that there are $26 billion in giveaways is unrealistic,’’ said Joe Donovan, a tax attorney with the Boston law firm Sullivan & Worcester.
The push to simplify the Massachusetts tax code mirrors similar efforts at the national level to eliminate many deductions and lower tax rates. President Obama and all the Republican presidential candidates have issued proposals to overhaul the tax code, though few observers expect Congress to make major changes this year.
In Massachusetts, officials say the number of special-interest tax breaks has grown over the years because it is often politically easier to give a group a tax break rather than to allocate money for it in the state budget. The reason: Reducing taxes is usually more popular than increasing spending.
Once a tax break is adopted, it is difficult to remove because lawmakers don’t have to renew it every year in the state budget. In addition, each tax break typically has strong proponents who will fight any repeal effort.
The aviation industry, for instance, blocked efforts to repeal a sales tax exemption on aircraft parts, arguing aircraft owners could fly to other states to repair their planes. The movie industry blocked an effort to reduce the size of the film subsidy program in 2010, arguing that it boosts tourism and creates jobs - though the Revenue Department found that the program has cost $142,000 per job for state residents.
State Representative Jay Kaufman, cochairman of the Legislature’s Joint Committee on Revenue, said he is optimistic the state will eliminate some tax breaks, since there is growing agreement there are too many.
“I would be surprised if we didn’t have tangible results within a year,’’ said Kaufman, a Lexington Democrat and member of the tax commission. “I think it’s going to take some leadership and political will.’’
Kaufman and other policy makers argue that many of the tax breaks complicate the tax code and give some taxpayers unfair advantages.
For example, if you need a new engine for your car, you will pay sales taxes on the parts. But if you replace the engine for your private jet, that is tax-exempt. Buy a hand-packed pint of Rocky Road in an ice cream parlor, and you will pay the sales tax. Buy the same pint at a grocery store, and you skip the tax.
Film a television commercial for a new beer and the state will pick up as much a quarter of the production tab. But make a radio commercial for the ale, and you won’t get any state aid.
“It doesn’t make any sense whatsoever,’’ Kaufman said. “I defy anyone to read the list of exemptions [in the tax code] and come up with some logic for it.’’
The state could potentially use the savings from eliminating deductions to lower overall tax rates, something many business groups and tax watchdogs favor. The state could also keep some of the additional revenue to fund education, transportation, public health, and other programs, Kaufman said.