Limited Taxation
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CLT Update
Friday, June 25, 1999

"[Massachusetts Taxpayers Foundation] President Michael Widmer noted that the $100 million annually that the fees generate 'is not chump change,' and that his group 'strongly supports' reimposing them."

The battle for the surplus is raging.

As you can see from some of the reports below, TEAM and the MTA teacher union are demanding their payback for killing our petition last year. And what is with this "Massachusetts Taxpayers Foundation" and their endless support of more and more revenue? Where's truth in advertising when you really need it?

When I testified before the Taxation Committee on Wednesday, I watched my words go in one ear and out the other of the committee members. They smiled, some nodded appropriately, I was thanked an  casually dismissed. Don't expect them to even consider giving any of the "Tobacco Settlement" taxpayer reimbursement back to its rightful owners, those who paid it for all those decades. They're going to spend   it -- like they've been spending the rest of the surplus ...

Unless we take it away from them!

Last Wednesday, I argued "It took 207 years for the state to reach its first $10 billion budget, but only the last dozen to more than double it ... When is enough enough?" The bigger-government-is-better crowd meanwhile was demanding that taxes be raised even higher and that even fees be increased! "MINE, MINE, MINE," they cry: "More Is Never Enough!"

We'll be sending out a mailing to every CLT member in the days ahead asking if you will support another petition drive to keep the promise and roll back the "temporary" income tax rate. We will be meeting again and working with Gov. Cellucci's Republican team to see how we can best merge our efforts.

After spinning my wheels before the Taxation Committee -- wondering exactly why I was wasting my time -- I now know that nothing else but taking it back ourselves is going to return this huge abundance of over-taxation and excess revenue to the taxpayers. We've surely tried, but nothing else will work. Nothing else.

Chip Ford --

State House News Service
June 23, 1999

JUNE 23, 1999 ... EJB ... Teachers unions, doctors and the Tax Equity Alliance of Massachusetts today urged lawmakers to hike the capital gains tax and use the extra money for school building construction.

Under the bill (H 2681) filed by Rep. James Marzilli (D-Arlington) and aired this afternoon before the Taxation Committee, capital gains would be taxed at 5.95 percent, the same rate as income. The tax currently phases out over a period of years, but amendments to the House and Senate budgets freeze the minimum rate at 2 percent.

Raising the rate to 5.95 percent would generate $141 million, which would be earmarked for building new schools and repairing or renovating old ones, said TEAM Executive Director James St. George.


The Boston Herald
Friday, June 25, 1999

A Boston Herald Editorial
Heed Treasurer O'Brien

At least a few people at the State House have heads on their shoulders.

Faced with a grab by the teachers' unions for drastically easier pension rules, members of the Legislature's Public Service Committee thought: Why should only teachers get such a break?

"You can't have these special groups picking apart" the pension law, said House Chairman Rep. Paul Casey (D-Winchester).

So they rewrote the bill to cover *all* public employees -- and more than doubling the number of potential beneficiaries -- and simplified the terms drastically: Retire at three-quarters pay after 25 years of service. Then they shipped it off to the House Ways and Means Committee. One of the jobs of ways and means committees is to find out how much such giveaways would cost -- and put the kibosh on anything excessive, which no doubt didn't escape the Public Service members.

Experience elsewhere with windfall pension benefits to mid-career employees shows that an astonishingly large number take the money and run -- which would mean a huge bill for Massachusetts and a potentially crippling loss of competence across the board. Treasurer Shannon O'Brien already has warned that such a move could jeopardize the soundness of the $26 billion state employee pension fund. This bill should be deep-sixed.

The Boston Herald
Thursday, June 24, 1999

Pols seek to reimpose RMV fees
for road and bridge repairs

by Laura Brown

The state should reimpose driver's license and registration fees that were eliminated three years ago to make up for administration cuts in a local road and bridge funding program, legislative leaders said yesterday.

"We plan to get a revenue stream for (local road and bridge) funds - it makes it a much more logical process," said Senate Transportation Committee Chairman Robert A. Havern III (D-Arlington.)

The state's so-called Chapter 90 program, which has grown steadily over the past decade to $150 million per year, pays for city and town highway projects that are not funded by the state's road and bridge program.

The Cellucci administration has proposed slashing the program's annual appropriation to $50 million, with another $50 million in cash from any available surplus.

Meanwhile, the state plans to invest $600 million per year - from state and federal funds - in the statewide road and bridge program.

The two chairmen of the Legislature's Transportation Committee attacked the local cuts at a hearing yesterday, vowing to recoup $100 million for the program by reimposing Registry of Motor Vehicle fees wiped out by former Gov. William F. Weld in 1996. "Their $100 million program is quicksand - it's not solid," said House Transportation Committee Chairman Rep. Joseph C. Sullivan (D-Braintree), suggesting that surplus money will not be available in the future to pay for the second half of the pot.

"We're trying to build a solid foundation for cities and towns," he added. "Two hundred-plus towns rely on Chapter 90 as their only source of infrastructure funding to improve their local roads."

Communities in Western Massachusetts are particularly dependent on the program, he said.

Weld's controversial elimination of the Registry fees during his unsuccessful U.S. Senate bid came at a time when the state was scrambling to work out funding for the $11 billion Big Dig.

Weld initially cut driver's license fees by $10, saying he was rolling back cost hikes implemented in 1989, and later implemented a lifetime driver's license program.

Federal officials questioned the state's commitment to paying for its Big Dig costs after Weld's action.

The Transportation Committee has repeatedly tried to reimpose the fees and the Mass. Taxpayers Foundation has called for their reinstatement.

But the Cellucci administration has opposed any reinstatement of the fees.

"It was our administration that basically repealed (the fees). We wouldn't support that," Transportation Secretary Kevin Sullivan said.

The fees include about $50 million in license fees and another $50 million in registration fees.

Before the elimination of the charges, Massachusetts drivers paid an annual fee of $35 to renew their registration and paid $33.75 every five years to renew their license.

Testifying yesterday in favor of using $274 million from the state surplus to pay off Big Dig debt, MTF resident Michael Widmer noted that the $100 million annually that the fees generate "is not chump change," and that his group "strongly supports" reimposing them.

State Administration and Finance chief Andrew Natsios backs the administration's proposed Chapter 90 program, but would not support new Registry fees to pay for a boosted program, spokesman Joseph Landolfi said.

Landolfi insisted that the state is committed to $100 million per year in Chapter 90 funding.

Havern and Sullivan both pledged to push for an override if Cellucci vetoes the Registry fee reinstatement.

The Patriot Ledger
Wednesday, June 23, 1999

Surplus cash: Boon for state or taxpayers?
By Gary Susswein

Free cash.

No two words can spark the imagination of a state official more quickly. An influx of free cash, usually from unanticipated tax revenues, can be used to pay for road repairs, saved in a rainy-day account or returned to the taxpayers.

It's a pleasant dilemma that Massachusetts has been dealing with as the economy has soared over the past five years.

Tax revenues have exceeded projections every year since fiscal 1995, giving the state as much as $1.3 billion more than expected. After years of limiting spending, officials have welcomed the surplus as a tool to pay for pressing needs and save for the future.

As the governor and Legislature complete the $21 billion state budget for fiscal 2000 over the next few weeks, every allocation from the surplus raises the nagging question of how much of the money belongs to the state and how much belongs to taxpayers.

"Historically, so much of the budgeting process focused on allocating resources in a strained environment," said Jay Walder, a professor at Harvard University's John F. Kennedy School of Government. "But the thrust has changed recently with the advent of the surplus."

Surpluses have emerged in Massachusetts and every other state for a variety of reasons that all stem from the strong economy.

Income-tax revenues have been higher than expected in Massachusetts because unemployment is less than 3 percent. Sales-tax revenue is up because people have extra money to spend. And more employees are receiving taxable bonuses, according to the Massachusetts Taxpayers Foundation.

The primary cause of the surplus, though, appears to be unforeseen increases in capital gains taxes, which investors pay when they sell stocks, real estate or other assets that have increased in value.

The state does not separate revenue from the capital gains tax from other income-tax revenue and could not provide specific figures about their growth.

But budget officials insist those taxes have been the key to the recent yearly surpluses. With the Dow Jones average jumping 86 percent in the past three years and more people investing in the stock market than ever before, Massachusetts residents are receiving more dividends and profits than just a few years ago.

"It all boils down to capital gains," said Undersecretary of Administration and Finance Kristen Keel.

To avoid being saddled with too little money if the stock market slows, however, the governor, House and Senate have made relatively conservative revenue forecasts throughout the 1990s and have repeatedly failed to forecast the capital gains surges.

"Unlike wages, which are built into a base, capital gains are something people have to achieve every year," said Tim Sullivan, director of finance for the state's fiscal affairs division. "To build a big capital gains estimate into our estimate would be dangerous."

Saving for a rainy day

State leaders have demonstrated that same conservatism in spending the free cash over the past five years.

As soon as the surplus began to appear, Citizens for Limited Taxation called on the state to use most of the cash to pay for a tax cut. But officials' first priority was to save enough money so that Massachusetts would never again have to endure what it went through in the late 1980s and early 1990s.

When hard times hit and tax revenues plummeted, the state had less than $100 million in its rainy-day account, known as the stabilization fund. Without a nest egg to support them, Gov. Michael Dukakis and the Legislature borrowed money and raised taxes to pay daily operating expenses.

They began using revenue from the Lottery to pay for statewide services instead of dedicating it all to local aid. Fiscal 2000 will mark the last time the state keeps part of that revenue instead of sending every dollar back to the cities and towns.

"The reason there was no money in the stabilization fund was because nobody thought there was a need to save," said former Dukakis Cabinet Secretary Edward Lashman. "The people who talk about a stabilization fund are also the first ones to demand money so their pet projects can be funded."

Maybe not this time around.

Gov. Paul Cellucci and the Legislature have stashed $1.2 billion in the stabilization fund, and the Legislature has twice increased the cap on the fund.

Republican Govs. William Weld and Cellucci and the Democratic Legislature have also agreed not to use the surplus for new programs. That practice contributed to a 9-percent annual increase in the budget in the late 1980s because every new program funded from the surplus invariably needed money to support it the following year.

"It's just a bad way of doing business," said House Minority Leader Francis Marini, R-Hanson. "What if next year is a recession year? Where are we then?"

The state has spent the money on one-time construction projects. Much of the surplus from fiscal 1999, for example, will likely pay for $300 million in road projects, including renovation of the Fore River Bridge between Quincy and Weymouth.

If not for the surplus, the state would have borrowed money for that work and added to the $15.4 billion long-term debt that still looms despite the short-term surpluses.

Back to the taxpayers

Over the past five years, officials have also used a limited amount of the free cash for tax cuts and have prided themselves on striking a balance between paying for construction, saving for the future and giving money back to the taxpayers.

But as the surplus has become a fixture, a growing number of critics have started to demand tax cuts.

"I don't think the government has the right to forcibly take money from people for a savings account," said Barbara Anderson, co-director of Citizens for Limited Taxation and Government. "This money should be in our saving accounts."

Anderson said the surplus is not the product of a strong economy or higher-than-expected capital gains revenues, but of a tax rate that is artificially high.

Dukakis and the Legislature raised the income tax from 5 percent to 6.25 percent a decade ago on the promise the increase would be rolled back when the fiscal crisis had passed.

The rate was dropped in 1992 to 5.95 percent, where it remains today despite proposals to cut it further.

"It's that extra tax rate of almost 1 percent that causes the surplus," Andersen said. "The only way they got that tax hike was they told people it would be temporary."

Even budget-watchers who supported the early efforts to build up the stabilization fund have begun to question whether the state needs any more money to shield it from a recession.

They point out that state officials who used to say they needed 5 percent of annual operating expenses in the stabilization fund now have nearly 7.5 percent stashed away. And they question why the Legislature keeps raising a cap that -- theoretically -- represents the maximum amount ever needed in savings.

"I have a hard time taxing people just to get money in the state's bank," said Michael Daley, a municipal finance consultant, who helped build Plymouth's stabilization fund when he was finance director there in the mid-1990s. "They should start letting that flow back out, either to spur the economy or in tax breaks."

Last year state officials embraced that philosophy more than they had in the past. They passed an election year tax cut of $1 billion and used part of the surplus to pay for about one-third of that.

In so doing, though, they may have hastened the end of the era of free cash in Massachusetts.

With the tax cuts in place and the economy beginning to slow, the amount of unanticipated tax revenues has fallen in 1999 for the first time since the early 1990s. It will likely end up between $300 million and $500 million, compared with $1.3 billion last year.

"We must remain ever mindful of the fact that the record revenue surpluses that the state has achieved the last couple of years are not likely to continue," warned state Treasurer Shannon O'Brien. "Although tax revenues continue to come into the state's coffers at a very healthy clip, pockets of slower growth have already begun to appear."

And the pleasant dilemma could soon begin to disappear.

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