Tax Smack

Where did all your money go?

By CARA BAYLES

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Unless you're hiding out from the IRS or lost your calendar, you probably filed your taxes yesterday. Ever wonder where your money goes when you see deductions on every paycheck?

Well, we'd like to tell you. But pie charts are deceptive creatures, carving out taxes into digestible slices that don't exist. While it would be nice to say exactly how many cents per state tax dollar pay for roads and schools, there are too many variables involved; the property value on your home or rental, how much state aid your town gets, whether you own a car, whether your town approved a tax override ... There are broader strokes to local taxes, but with funds bouncing back and forth between towns and the state, and the budget process' imprecision, the closer you get to the money trail, the harder it becomes to trace.

Taxachusetts

Sales tax (which tacks 5 percent onto most purchases) and state income tax are collected by the Commonwealth. Some revenues are reserved for specific programs; 85 percent of gas tax revenues went to the Highway Fund, 18 percent of the sales tax went toward the School Building Trust and 21 percent of sales tax went to the MBTA last year. The remainder of those taxes—and all income, cigarette and alcohol taxes—go to the "General Fund," or the state's budget.

A $1.3 billion deficit is projected for next year's budget, meaning the budget exceeds revenue projections, and the legislature must find quick-fix solutions, like borrowing from the rainy day fund, raising taxes and cutting programs. Gov. Deval Patrick promoted casinos, and Speaker Sal DiMasi endorsed a cigarette tax increase, because revenues could be used to pad the budget. When former Gov. Mitt Romney boasted he "balanced the budget four years in a row," he referred to closing corporate loopholes, raising licensing fees and cutting programs, so that he wouldn't have to raise taxes. But all budgets are balanced; the state can't spend more than it has.

The process of divvying up the general fund begins seven months before the fiscal year starts. In December, experts present revenue predictions for the next fiscal year to the Ways and Means Committees. The budget is built on those predictions.

Michael Widmore, of the Massachusetts Taxpayers Foundation, has presented at these hearings for the past 20 years. "It's imprecise," he admits. "Every projection is going to be off since no one can predict the future. We're trying to manage degrees of risk and make a conservative forecast."

But the economy changed over the past few months. Since the December revenue forecast for fiscal year '09, storm clouds have collected.

"It was a reasonable estimate at the time. But now we're either in or about to enter a recession," Widmore says. "As a result, there's been a sell-off in the stock market, so capital gains tax may be less than anticipated. All we're suggesting is that the state's leaders review the estimate, and determine whether it's sound ... I don't think it is."

Widmore has met some resistance. The governor drafted next year's budget in January based on the predictions, and the House Ways and Means Committee release their budget rewrite Wednesday. Budgets are often adjusted during the fiscal year. The '08 budget was adjusted in October, when revenues were higher than projections.

"If you build a budget around a more conservative estimate, it will be much easier than cutting costs in the middle of the year," Widmore says. "It will have less of an impact if in fact the recession is serious."

Bob Bliss, with the Massachusetts Department of Revenue, says income tax revenues from July through March exceeded benchmarks by $196 million.

"When you add up sales, meals and excise tax, we're cutting it kind of close. We've got $3.073 billion, which is $21 million ahead of where we were last year, but $38 million below where we projected we'd be," Bliss says. "But income tax isn't down. People may be losing their houses, but not their jobs ... If there's going to be a slowdown in income tax collection, it hasn't started to materialize yet."

Taxville

Property taxes make up 36 percent of state revenues (last year, they totaled nearly $10.5 billion), and—along with excise taxes on motor vehicles—go to local budgets. So a town's property values determine how much it can afford for schools, roads and other general infrastructure. Property taxes are capped by Proposition 2 1/2, which prohibits a town from levying more than 2.5 percent of its total real estate, and from increasing tax levels by more than 2.5 percent of the previous year's tax revenue.

Barbara Anderson is the Libertarian activist who led the Prop 2 1/2 crusade in the Reagan era. "We had the highest property taxes in the country. Now, thanks to 2 1/2, we have the 12th highest," Anderson says. "People who think raising taxes will address a budget crisis are wrong. They just keep spending, and then they borrow, but they're always raising taxes, without addressing the root of the problem. They need to prioritize their spending."

Proposition 2 1/2 passed by popular ballot in 1980. Since then, many towns voted for overrides, tax increases (also passed by popular ballot) that would raise the tax ceiling for specific needs. Since 1983, 40.3 percent of the 4,307 overrides proposed have passed.

"When we created 2 1/2, we put the override option in it," Anderson says. "People were so angry about property taxes, it never occurred to us that anyone would approve anything unless it was an emergency. It never occurred to us that an override would pay for raises and operating expenses."

The Massachusetts Municipal Association predicts 60 towns will apply for overrides this year. So far, four out of nine towns have approved at least one of the overrides on their ballot.

Since 2005, Randolph has proposed overrides that failed at the ballot. The school system plunged in Board of Education evaluations, from "needs improvement" to "underperforming," and faces state receivership.

Jim Burgess has been on the town's Board of Selectmen for 15 years, and longed for the budget surplus of 1996 as the board decided to put override questions on the ballot for the fourth year in a row. "State aid has not kept up with our costs, nor has our revenue. The cost of utilities, salaries and fuel keeps going up. We haven't been able to keep pace," he says. "We've trimmed our budget in the past. It got to the point where our school was in deplorable position, and when police officers retired, we wouldn't replace them."

Randolph passed its overrides on April 1st, giving $5.5 million to schools, $411,322 to the police department and $200,000 to the fire department.

Larry Azer, chairman of the Randolph School Committee, says this fiscal year, without the override, the Randolph school budget would have been $29.6 million—$11.8 million came from state aid, $17.8 million from state tax revenues. Next year, the budget will jump to $35.4 million. Azer hopes this will save the school from state takeover.

"We have to put together a turnaround plan for the Board of Education by May that will tell them how we would improve achievement, and how we will ensure that plan is implemented. We've been planning the first part for a while. Now that we have the resources, the second part will be easier," Azer says. "We haven't had a budget increase in five years. We fired teachers, had no curriculum development and no new books. We cut junior varsity sports. If you compared the budget flattening out to student achievement, you would see a direct correlation."

The override will give the police force an 8 percent budget increase. The force has 47 officers, a record low compared to 2001's 61. Chief Paul Porter hopes to hire 12 new officers this year, and to reinstate the youth violence and street crime unit. While violent crime has gone down, the type of violence has become more high-profile (murders instead of domestic abuse), which may have garnered support for the police override. "Since 2006 we've had four homicides. In my 33-year career here, I've seen nine homicides," Porter says. "These issues are connected. When the school eliminates after-school programs, youth violence increases."

The override vote wasn't easy, but some hope the investment will raise property values, which currently average $334,883. "We reached a tipping point. If we didn't take action, we were going to lose the town," Porter says. "It wasn't easy. People envision Randolph as a bedroom suburban community, but as the metropolitan area expands, we've become more urban."

But bedroom suburban communities aren't exempt from override fever. In Newton, where the average property value is $818,978, there's a $12 million override on the ballot this May.

Rob Gifford, a Newton resident with three kids, is a member of Move Newton Forward, the town's pro-override group. "Like cities and towns across the Commonwealth, Newton faces a structural deficit," he says. "Municipal expenses are growing by 10 to 12 percent each year. That's a much faster rate than the town's new growth."

But many Newtonians—like Jeff Seideman, of Newton for Fiscal Responsibility—are reluctant to spend more on schools, since construction on Newton North High School, originally budgeted at $56.5 million, exploded to $197.5 million.

"It's insulting. We're not complete morons," Seideman seethes. "The mayor says he's going to put money from the override in the stabilization fund, which he's dipped into to pay for the school. The school budget is 58 percent of entire city's budget. If it gets the override, it'll grow 8.8 percent, while the town budget increases 3.3 percent. Sooner or later, they've got to deal with the problem."

Tax overrides may look different in each town, but declining state aid and rising costs are universal. Last year, the state gave a net total of $4.88 billion to municipalities. State aid is meant to help municipalities, and to offset property value disparities. But the recession of 1991 and 9.11 tightened the purse strings and there's a distinct dip during the Romney years (in fiscal year 2004, when Romney got his first crack at the budget, state aid dropped from 2003's $4.91 million to $4.38 million). The current economic nosedive suggests there won't be a turnaround anytime soon.

Taxpocalypse

Last week, Gov. Patrick unveiled his economic stimulus package during a speech at MIT.

"State government is too fiscally constrained to ride to the rescue at times of broad, national economic distress," Patrick said. "Still, as anxiety builds, and with our people asking for help, state government must do what it can."

After promising to "restrain discretionary spending"—citing figures of $515 million in budget cuts last year, and $344 million more for fiscal year '09—Patrick promised to "invest aggressively in our infrastructure and our people" by courting companies with tax breaks, and starting on much-needed repairs of roads and bridges, affordable housing, and "a massive restoration of this Commonwealth.

"All told, we are talking about investing up to $16 billion in our public infrastructure in the next several years, and front-loading as much of that as we responsibly can."

These projects will be funded with bonds, loans that accrue interest. And you're paying for it. This year, 1.77 billion out of the $26.8 budget went to debt services.

"They've been borrowing all the time, so any particular year, something from 30 years ago gets paid off," Widmore explains. "It's like buying a house. You can't afford it all at once."

If bonds are like mortgages, the governor wants to buy up the neighborhood; $1 billion for life sciences, $2 billion for public higher education, $1.4 billion for the environment, and now $16 billion for much-needed infrastructure repairs, to name a few long-term projects.

The philosophy is that by investing in the state, the increase in revenues and jobs will pay for itself, even stimulate the economy (like the Public Works program during the Great Depression). "It's a pretty commonly accepted fiscal government policy, in all the states," says Bob Bliss. "And the federal government is the granddaddy of all borrowers ... Uh, that's probably not the best example, actually," he adds, referring to the $9.5 trillion national debt.

But the governor remains optimistic. "I have confidence in the Commonwealth," he said, after outlining a plan to raise taxes during this recession. "And so should you."