CITIZENS   FOR  LIMITED  TAXATION
and the
Citizens Economic Research Foundation

CLT UPDATE
Tuesday, March 8, 2005

Taxpayers' employees, a class of their own


President Bush is considering a controversial new source of revenue to help fix Social Security: shutting off the exemption from Social Security taxes of future state and local public employees who otherwise would be contributing to public pension plans.

For Massachusetts, where more than 300,000 public workers are exempt from the Social Security tax, the change could end up costing taxpayers billions of dollars, according to state officials....

There are 106 public retirement plans in Massachusetts. Most of the public school teachers in Massachusetts, for example, contribute to a pension plan that pays an average annual benefit of about $27,000. State workers get an average pension payment of $20,513. By comparison, Social Security pays an annual average benefit of $11,400.

Many of those fighting hardest against Bush's idea for private investment accounts in Social Security are labor unions that are also fighting to ensure that the 5 million public workers nationwide remain exempt from the Social Security system and can stay in public pension plans that invest in the stock market.

The American Federation of Teachers, for example, "is a very strong supporter of the Social Security system but also a strong supporter of the existing plans outside the Social Security system," said the organization's chief congressional lobbyist, Bill Cunningham....

Many city and town governments in Massachusetts also run separate pension plans for their employees....

Unlike what Bush is proposing, the worker in the state plan gets a fixed, guaranteed pension that does not directly reflect ups and downs in the market; under Bush's plan, a retiree's pension would be affected by gains or losses in his investments.

"For Massachusetts, and the state's teachers, we have done very well in the markets and have moved to fiscal solvency with our retirement system," said Sean P. Neilon, assistant executive director of the Massachusetts Teachers' Retirement Board. He noted that teachers put 11 percent of their salary into the pension fund.

For comparison, the Social Security tax is 12.4 percent, divided evenly between employee and employer. If the comparison is viewed strictly as one solely involving employee contributions, the Massachusetts teachers pay a higher rate: 11 percent vs. 6.2 percent. But Neilon said the teachers like the higher benefits. And some longer-serving teachers paid contributions as low as 5 percent.

The state is now helping to make up for those lower contributions, with much of the $1.2 billion from general revenues going annually to support the fund that pays benefits to teachers and most state workers.

The Boston Globe
Monday, March 7, 2005
State sees burden in Bush funding idea
President mulls tax on public workers


It's no secret that a part-time Legislature making part-time pay would be welcome in these quarters. So we suppose we ought to be relishing the slow start of the new legislative session.

But since taxpayers pay the freight for 12 full months of legislating and some important measures are now stuck in legislative limbo, we urge the House and Senate to, well, get a move on....

We know come December, we'll be decrying the marathon sessions that mar the end of every legislative year. It's a seemingly unavoidable quirk of legislative nature. But if we can't hope to have the legislative session end well, can this one at least get started?

A Boston Herald editorial
Monday, March 7, 2005
Speeding up Beacon Hill


Lawmakers debated legislation last session that would have allowed cities and towns to raise the property tax exemptions for senior citizens and another bill that would have granted certain elderly residents an exemption from Proposition 2 overrides. The latter proposal received House approval, but died in the Senate. The broader tax relief package did not pass either branch.

"The biggest concern I am hearing from seniors in my district is property tax relief," said Rep. Cory Atkins (D-Concord)....

At a separate meeting of the Legislature's Municipal Caucus Monday, legislators said there is increasing evidence in their districts that property tax relief is needed. Rep. Alice Peisch (D-Wellesley) said conflicts between elderly residents and parents of school children are becoming "untenable."

Tucker said she believes the Legislature will be able to approve legislation granting some sort of senior property tax reprieve this session.

"Community after community is talking about pitting the needs of seniors against schools," she said. "Seniors on fixed incomes are finding it impossible to stay in their homes. This will be the year we give significant property tax relief to the seniors."

State House News Service
Monday, March 7, 2005
Lawmakers: Senior tax relief,
long-term care atop their priority lists


The same plaintiffs that successfully argued last year that the state's mid-year change to the rate structure for taxing capital gains is unconstitutional are back in court on Monday. This time, the plaintiffs are saying the legislative remedy passed last year in response to the original court ruling is unconstitutional.

State House News Service
Advances - Week of March 7, 2005
SJC to hear second round of capital gains arguments


Sometimes the Massachusetts Legislature is too cute by far. And sometimes legislators actually get caught at it. This is one of those times....

If there's one thing legislators are loathe to do, it's return money to taxpayers. That's what got them in this bind in the first place. Now there's a $400 million "swing" in play as legislators begin their budget crafting for this year - as if that weren't difficult enough!

A Boston Herald editorial
Tuesday, March 8, 2005
A taxing question for SJC


Chip Ford's CLT Commentary

We recently learned that while the economy was in recession and private sector employees' salaries either stagnated or fell, the public sector enjoyed its usual pay raises, its high standard of living uninterrupted and unaffected (CLT Update, Jan. 25, "Property taxes skyrocket while Public Employees swim in salaries"). In his Boston Herald column, "When unions fail children," Charles D. Chieppo noted:

"From 2000, the last year before the most recent recession, to 2003, total private sector wages in Massachusetts actually decreased. But state and local government employees had a very different experience. The Bureau of Labor Statistics reports that their wages grew by nearly 12 percent, and a 2003 BLS report found that public employee wages in eastern Massachusetts were also 12 percent higher than those of private employees doing comparable jobs...."

Even our legislators got their automatic pay raise this year. Though their salary adjustment is supposed to be based on the rise or fall of median household income, according to Chieppo that fell -- at least in the private sector. Yet somehow they still managed to increase their salaries. On Dec. 7, 2004, the Boston Globe reported, "The US Census bureau reported in August that the two-year average of the state's median income was $50,976 in 2002-2003, down sharply from $52,649, the 2001-2002 average...." Yet the legislators' pay hike was based on an increase from 2003-2004 of 4.1 percent. (CLT Update, Dec. 7, 2004, "On Bacon Hill it's called 'income equity'") Go figure -- unless there are now enough public employees to offset the private sector.

Only government employment is immune from the vicissitudes of economic cycles,  and now we learn that it is exempt from forced participation in the doomed Social Security system as well. It's good enough for us taxpayers, but they've got a better deal: their own private pension plans! While you and I can hope for an average yearly Social Security benefit of $11,400 when we retire, a state worker can count on a taxpayer-guaranteed average annual pension payment of $20,513, and pass it on to their heirs! And they sure don't want us getting in on a better deal too, catching up to their advantages:

Many of those fighting hardest against Bush's idea for private investment accounts in Social Security are labor unions that are also fighting to ensure that the 5 million public workers nationwide remain exempt from the Social Security system and can stay in public pension plans that invest in the stock market.

The American Federation of Teachers, for example, "is a very strong supporter of the Social Security system but also a strong supporter of the existing plans outside the Social Security system," said the organization's chief congressional lobbyist, Bill Cunningham....

Many city and town governments in Massachusetts also run separate pension plans for their employees....

Taking advantage of us, their taxpaying employers,  is nothing new -- but attempting to keep our retirements inferior to theirs is an obscene travesty we should not tolerate.

*                    *                    *

"The Best Legislature Money Can Buy" is still idle and confused more than two months into the new session. After months of doing nothing at all but running for reelection, our "full-time" legislators are doing little if anything. But some are planning to resurrect legislation which we managed to defeat last year. While we advocate for all sorts of tax relief wherever we can, we're always alert for scurrilous divide-and-conquer stratagems designed to grease the skids for future tax increases, such as the cyclical push for a graduated income tax.

Last year we helped blocked passage of the so-called senior citizens property tax exemption (CLT Update, Feb. 26, 2004, "Gov. vows veto of Prop 2 assault"), but it appears that it'll be back again this year, if the Legislature ever gets back to work.

"The biggest concern I am hearing from seniors in my district is property tax relief," said Rep. Cory Atkins (D-Concord)....

[State Rep. Susan] Tucker said she believes the Legislature will be able to approve legislation granting some sort of senior property tax reprieve this session.

"Community after community is talking about pitting the needs of seniors against schools," she said. "Seniors on fixed incomes are finding it impossible to stay in their homes. This will be the year we give significant property tax relief to the seniors."

It's not just taxpaying seniors who feel abused and overburdened.

*                    *                    *

Perhaps the Legislature is spinning its wheels for good reason. First there was the Hancock school funding case before the state Supreme Judicial Court, the outcome of which could have seriously affected budget decisions. Fortunately, the SJC didn't order hundreds of millions if not billions more of tax revenue to be pumped into the Education Industrial Complex (CLT Update, Feb. 16, "SJC pulls rug from under tax-and-spenders' scheme").  Now the Legislature's made itself another bed it must sleep in, once the bed is made. It got too cute by far trying to grab retroactive increased capital gains taxes. It now has no idea whether the state will have more revenue to spend than anticipated, or less.

And to close by coming full circle, recall that the Legislature got its outrageous 55 percent pay raise in a 1994 quid pro quo scam that reduced the capital gains tax in exchange for Governor Weld's agreement not to veto the pay grab. They got their pay hike, Weld got his capital gains tax cut -- and as usual, the Legislature later reneged on it's part of the deal but of course kept its obscene pay raise.

And they wonder how we ever got this cynical!

Chip Ford


The Boston Globe
Monday, March 7, 2005

State sees burden in Bush funding idea
President mulls tax on public workers
By Michael Kranish, Globe Staff


WASHINGTON -- President Bush is considering a controversial new source of revenue to help fix Social Security: shutting off the exemption from Social Security taxes of future state and local public employees who otherwise would be contributing to public pension plans.

For Massachusetts, where more than 300,000 public workers are exempt from the Social Security tax, the change could end up costing taxpayers billions of dollars, according to state officials.

One proposal under discussion at the White House would preserve the exemption from Social Security tax for state and local workers who do not have to pay it but would cut off the exemption for new workers.

If the proposal were enacted, state and local governments would have to compensate for the decrease in money flowing into pension plans from new employees. In addition, state and local governments would have to start paying millions a year as the employers' share of Social Security tax.

While Bush is considering many options in his drive to overhaul Social Security, his press spokesman, Trent Duffy, said in an interview last week that the idea of ending the exemption from Social Security for new public workers is on the table.

"To the extent that is an idea that may be part of a final solution, the president would be open to it," Duffy said. "It is something that should be studied and be part of an overall discussion."

Massachusetts officials say their system works far better than the current Social Security system and indicate they will fight any proposal that attempts to alter it.

There are 106 public retirement plans in Massachusetts. Most of the public school teachers in Massachusetts, for example, contribute to a pension plan that pays an average annual benefit of about $27,000. State workers get an average pension payment of $20,513. By comparison, Social Security pays an annual average benefit of $11,400.

State Treasurer Timothy P. Cahill said that ending the exemption would be a "disaster" for Bay State public workers and taxpayers, as well as for the Social Security system. One study indicated that Massachusetts taxpayers would have to supply $2 billion over a five-year period to compensate for the change.

"It would make more sense for the federal government to look at our system as a model, as opposed to opting into their model, which is clearly broken," Cahill said.

He said he is aware the idea of ending the exemption is attractive to some White House planners because it would bring in a "huge infusion" of Social Security taxes, at least in the short term.

Notably, the AARP, which represents 35 million older Americans, endorsed the idea of ending the exemption for public employees in a Feb. 9 briefing paper. The AARP calculated that requiring new public workers to pay Social Security taxes would cut the program's shortfall by 9 percent in the short term, although some analysts say new revenue would be offset by the need to pay future benefits for new enrollees.

Nationwide, about 5 million public workers, or 25 percent of those in state and local public employment, do not pay Social Security taxes. The bulk of the exempt workers are in seven states: California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas. The exemptions are allowed because Social Security originally covered workers only in the private sector. Many public workers were covered by pension plans before Social Security was created.

Several public pensions in Massachusetts, for example, began in the early 1900s providing a model for the federal system. The federal government eventually offered to provide Social Security to all public employees, but gave existing pension plans the right to opt out of the federal system. Massachusetts officials have chosen to remain out of the Social Security system for nearly all public employees.

Many of those fighting hardest against Bush's idea for private investment accounts in Social Security are labor unions that are also fighting to ensure that the 5 million public workers nationwide remain exempt from the Social Security system and can stay in public pension plans that invest in the stock market.

The American Federation of Teachers, for example, "is a very strong supporter of the Social Security system but also a strong supporter of the existing plans outside the Social Security system," said the organization's chief congressional lobbyist, Bill Cunningham. He stressed that Bush's plan relies on private accounts managed by individuals, while the pension investments are pooled together and decisions are made by professional money managers.

Critics say the unions are trying to have it both ways: fighting the Bush plan on grounds that private accounts are too risky, while fighting to ensure that 5 million workers are exempt from Social Security and thus able to benefit from pension plans that rely on stock market investments.

"Clearly it is hypocrisy to have the security of private investment and then claim that this would somehow be risky if everyday people had that opportunity with their Social Security money," said Scott Hodge, president of the Tax Foundation, a think tank. "If those [pension] funds did not grow in value over time, then they would not be able to pay their promised benefits."

The Massachusetts Pension Reserves Management Board, which controls the investments for most Massachusetts teachers and many state employees, puts far more money into stocks and potentially riskier investments than Bush has proposed be allowed in private accounts. Many city and town governments in Massachusetts also run separate pension plans for their employees.

It is difficult to compare Social Security and the public pensions because many of the pensions plans have different rates of contribution and benefits. But in general, the unions representing many of the 5 million workers in public pension plans nationwide say public workers prefer their system of benefits, which often are higher than Social Security, even if they have to contribute at a higher rate than the Social Security tax rate. Bush has proposed that all American workers be given the option of putting up to four percentage points out of the total 12.4 percent of Social Security tax paid by employees and employers into private accounts, with investments restricted to a small pool of relatively conservative mutual funds.

The Massachusetts plan for most teachers and state employees, by comparison, has 57 percent of its assets in equities, including 21 percent in international investments as part of an effort to diversify and lower the overall risk, state officials said. The fund also puts money into real estate, timber, and other investments. Last year, the state fund also placed 5 percent of its assets in hedge funds, which can bring higher returns than a more conservative investment like a stock index fund but also carry higher risks.

Before those moves, the fund had declined in value over a three-year period ending in 2002. After the investments were broadened, the fund had a return of 26 percent in 2003, followed by a 14 percent return last year. This two-year spurt helped increase the fund's assets from $26 billion to $36 billion. The fund has an average annual rate of return since 1985 of 11 percent. Unlike what Bush is proposing, the worker in the state plan gets a fixed, guaranteed pension that does not directly reflect ups and downs in the market; under Bush's plan, a retiree's pension would be affected by gains or losses in his investments.

"For Massachusetts, and the state's teachers, we have done very well in the markets and have moved to fiscal solvency with our retirement system," said Sean P. Neilon, assistant executive director of the Massachusetts Teachers' Retirement Board. He noted that teachers put 11 percent of their salary into the pension fund.

For comparison, the Social Security tax is 12.4 percent, divided evenly between employee and employer. If the comparison is viewed strictly as one solely involving employee contributions, the Massachusetts teachers pay a higher rate: 11 percent vs. 6.2 percent. But Neilon said the teachers like the higher benefits. And some longer-serving teachers paid contributions as low as 5 percent.

The state is now helping to make up for those lower contributions, with much of the $1.2 billion from general revenues going annually to support the fund that pays benefits to teachers and most state workers. But state officials said the fund should be financed through payroll contributions in about 20 years.

Bush has backed only the idea of private accounts controlled by individuals, and he has opposed suggestions that the trust funds -- currently invested in US Treasury bonds -- be put in the stock market in a manner similar to pension fund investments. The White House has noted that the Federal Reserve Board chairman, Alan Greenspan, who has been generally supportive of Bush's proposal for private accounts, has opposed investing Social Security trust funds directly in the stock market.

But to Massachusetts officials, the problems with Social Security have a familiar ring. In 1983, the state's public pension plans were run in a manner similar to Social Security, with the system rapidly going broke as it relied on contributions from younger workers to support a growing number of beneficiaries. Part of the solution was to allow public pension funds to be invested in the stock market.

Duffy, the White House spokesman, said one problem with the direct investment of Social Security trust funds in the market is the "temptation and the risk of political manipulation in the markets buying and selling politically correct stocks and bonds." For that and other reasons, Duffy said, "the president is dead set against the government investing directly in the markets."

The Massachusetts Legislature prevents the state pension funds from investing in tobacco stocks. The California Public Employees' Retirement System is famous for trying to influence the decisions of some corporations in which it holds stock. Proponents of investing the Social Security trust fund in stocks said that these problems could be eliminated by putting the money in index funds, which mirror broad stock categories without direct management.

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The Boston Herald
Monday, March 7, 2005

A Boston Herald editorial
Speeding up Beacon Hill


It's no secret that a part-time Legislature making part-time pay would be welcome in these quarters. So we suppose we ought to be relishing the slow start of the new legislative session.

But since taxpayers pay the freight for 12 full months of legislating and some important measures are now stuck in legislative limbo, we urge the House and Senate to, well, get a move on.

OK, there's an argument that the substantial restructuring of legislative committees, in title and turf, understandably gummed up the works for a bit.

But committee assignments were made Feb. 7, and those newly appointed chairmen have had precious little to do since. Many bills have yet to be assigned to committee, never mind scheduled for a public hearing.

Proving the point that legislative leaders can move any bill quickly, if they so desire, Senate President Robert Travaglini and House Speaker Sal DiMasi predict a stem cell research bill will soon be sent to the governor's desk.

We strongly support its passage, but its speedy enactment means there's no excuse for a bill requiring national background checks for teachers and measures cracking down on witness intimidation, among scores of other matters, not to at least be assigned to a committee.

We suspect that one of the hold-ups is squabbling among committee chairmen over jurisdiction. If Travaglini and DiMasi don't want to choose among their loyalists, maybe they can let the chairmen draw straws, or even do "eeney, meeney, miney mo" as frustrated parents sometimes resort to when resolving disputes amongst cranky youngsters.

We know come December, we'll be decrying the marathon sessions that mar the end of every legislative year. It's a seemingly unavoidable quirk of legislative nature. But if we can't hope to have the legislative session end well, can this one at least get started?

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State House News Service
Monday, March 7, 2005

Lawmakers: Senior tax relief,
long-term care atop their priority lists
By Cyndi Roy


Tax relief and long-term care top the list of priorities for the Legislature's Elder Affairs Committee, members said Monday at the first meeting of the newly formed committee.

When asked by co-chairwoman Sen. Susan Tucker (D-Andover) what they hoped to accomplish as a committee, most members agreed that property tax relief will be a chief issue this session.

"I represent an aging community and they're concerned about their rising property taxes," said freshman Rep. James Welch (D-West Springfield). "Until that battle is won, it has to remain a priority."

Lawmakers debated legislation last session that would have allowed cities and towns to raise the property tax exemptions for senior citizens and another bill that would have granted certain elderly residents an exemption from Proposition 2 overrides. The latter proposal received House approval, but died in the Senate. The broader tax relief package did not pass either branch.

"The biggest concern I am hearing from seniors in my district is property tax relief," said Rep. Cory Atkins (D-Concord).

The committee has not formally received any bills to date, but several property tax relief proposals have been filed. One, sponsored by Rep. Paul Casey (D-Winchester), would give cities and towns the option of offering an exemption to seniors equal to 10 percent of a community's average assessed home value. It would also broaden the eligibility for the senior "circuit breaker" tax credit from $400,000 to $600,000.

At a separate meeting of the Legislature's Municipal Caucus Monday, legislators said there is increasing evidence in their districts that property tax relief is needed. Rep. Alice Peisch (D-Wellesley) said conflicts between elderly residents and parents of school children are becoming "untenable."

Tucker said she believes the Legislature will be able to approve legislation granting some sort of senior property tax reprieve this session.

"Community after community is talking about pitting the needs of seniors against schools," she said. "Seniors on fixed incomes are finding it impossible to stay in their homes. This will be the year we give significant property tax relief to the seniors."

In addition to property tax assistance, committee members said they will promote the issue of long-term care.

Rep. Barbara L'Italien (D-Andover) said she will file legislation called the "Caring Circle," which would make permanent a program being piloted by the Executive Office of Elder Affairs. The program pays certain relatives of Medicaid-eligible seniors for taking care of their senior family members. L'Italien estimates the program would cost $5 million a year and would cover about 140 seniors a month statewide.

"It's another tool in the arsenal for taking care of the growing elder population," she said. "It allows someone the ability to care for a parent or relative without totally losing their income."

Tucker has filed separate legislation to allow the state budget to cover more home care and help control its larger long-term care costs.

"The long-term care and home care issues are very important," Tucker said. "Seniors should be cared for in the setting they prefer to be in, and the money should follow that person. A disproportionate amount of money is spent on institutions where people don't want to live."

Advocates for seniors say long-term care services remain a critical area of concern for residents.

"An important issue for us is long-term services and supports," said Jessica Costantino, director of advocacy for AARP Massachusetts. "Whether it's care through home and community-based service or assisted living facilities, there are issues of what quality is, how care is funded, and how people have access to care and long-term care insurance."

In addition, members said they hope to look at prescription drug prices, Medicaid, elder abuse, and facilities for Alzheimer's and dementia patients.

Co-chairman Rep. Robert Correia (D-Fall River) said he hopes the establishment of the new committee will allow lawmakers to give seniors the attention they may have lacked in the past. "I want to make life for elderly residents in the Commonwealth more pleasant, take care of their medical needs, and any other needs they may have," he said.

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State House News Service
Advances - Week of March 7, 2005

SJC to hear second round of capital gains arguments


The same plaintiffs that successfully argued last year that the state's mid-year change to the rate structure for taxing capital gains is unconstitutional are back in court on Monday. This time, the plaintiffs are saying the legislative remedy passed last year in response to the original court ruling is unconstitutional.

The SJC ruled last April that the state cannot treat taxpayers in the same class differently during the same calendar year, as it did when it changed the system for taxing capital from a graduated system to a flat rate of 5.3 percent in May 2002. This year's state budget moved the effective date of that change to Jan. 1, 2002, while providing an amnesty to any taxpayers that would have had to pay more under the new structure.

The state is arguing for the court to agree that the original intent of the Legislature was to change the rate to Jan. 1, 2002, while the plaintiffs say they are due roughly $250 million in back taxes from the state and the effective date ought to be Jan. 1, 2003. The case, Peterson vs. Commissioner of Revenue, is the first on Monday's SJC docket.

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The Boston Herald
Tuesday, March 8, 2005

A Boston Herald editorial
A taxing question for SJC


Sometimes the Massachusetts Legislature is too cute by far. And sometimes legislators actually get caught at it. This is one of those times.

In an attempt to extract more money from taxpayers lawmakers raised and restructured the capital gains tax in 2002, and initially made it effective as of May 1 of that year. That caused different people to be taxed at different rates depending on when they sold an asset.

In a 4-3 decision last April the Supreme Judicial Court said, "Only one tax rate may be applied to all long-term capital gains realized in calendar year 2002."

The Legislature could have made the tax retroactive for all taxpayers or simply not put the tax into effect until 2003. But we're talking about the Massachusetts Legislature, after all, so their second-round solution was to make the law effective Jan. 1, 2002, but exempt those who had sold assets prior to May 1.

That pretty much maintained the status quo the court had already ruled unconstitutional. Not surprisingly the case was back before the SJC yesterday. Now if the court rules the effective date of the law is Jan. 1, 2003, then those who paid the new capital gains tax are owed about $250 million, according to the Department of Revenue.

If, however, the effective date of the law is Jan. 1, 2002, then some taxpayers are going to have to dip into their wallets collectively for another $160 million.

Chief Justice Margaret Marshall also raised the issue during yesterday's argument about what happens much later to taxpayers who find out they owe money. Are there then penalties and interest to be paid?

Noting there is still only one group of taxpayers (those who sold assets after May 1) who are impacted she added, "There's something that smells of a little unfairness."

And as Justice Martha Sosman noted there are some taxpayers who are in both categories, paying at two different rates because assets were sold at different times.

If there's one thing legislators are loathe to do, it's return money to taxpayers. That's what got them in this bind in the first place. Now there's a $400 million "swing" in play as legislators begin their budget crafting for this year - as if that weren't difficult enough!

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