David R. Henderson  

Constitutions Matter: The Case of Massachusetts

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Update: Scott Sumner responds.

Sometime in the next 24 or so hours, I'll give my thoughts on the latest tax and budget deal between Congress and President Obama. I find that one's first thoughts are not typically one's best. There's a lot to digest. What I can say at this point, though, is that, given the constellation of political forces, it was not a bad deal except for the delaying of the sequester, the one serious attempt we've had in the last few years to cut discretionary spending.

I can also say that I'm not as critical of the deal as Scott Sumner or Steven Landsburg.

There is one item in Scott Sumner's post, though, that I think is way off and that I want to comment on. Scott writes:

Have you ever noticed that many ultra-conservative southern states have steeply progressive state income taxes, whereas Massachusetts has a 5.3% flat tax, and liberal Washington State has no income tax at all. Watch what they do, not what they say.

I don't know enough about Washington state. But I do know about Scott's state of Massachusetts. What Scott doesn't seem to realize is that Massachusetts' flat tax rate is mainly the result of political forces 200 years ago, not political forces today. The flat tax rate is due to the Massachusetts Constitution. I wrote about this briefly in 1997. Here's the relevant part:
Article XLIV. Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements.

In other words, Massachusetts has a flat tax rate on income because the Constitution requires that any tax rate be a flat rate.

But the desire to take more from "the rich" is strong in Massachusetts as elsewhere. How does the Massachusetts legislature get around this limit? By having a much higher tax rate--12 percent--on short-term capital gains. The rate, as required by the Constitution, is the same for people at all income levels. But who do you think gets a disproportionately high share of their income in the form of short-term capital gains? That's right: high-income people.

The bottom line: the Massachusetts Constitution, not the legislature of Massachusetts, should get credit for Massachusetts' flat-rate tax.


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COMMENTS (8 to date)
Daniel writes:

Interesting, I did not know that. I always wondered why the rate was so flat and low for such a blue state.

Also I would point out that Sumner is guilty of cherry picking. Why didn't he mention Texas, Alaska, Wyoming or Utah on the one hand and New York, California, Oregon or Hawaii on the other?

Also Washington recently tried to pass an income tax and obviously it failed this time around, but give it a few years.

Arthur_500 writes:

Alaska is indeed speaking with tongue in cheek. The deal to put oil wealth into a special fund so as not to blow, it all involved the elimination of the Income Tax. This is obviously a dumb idea in that people are happy to spend someone else's money and therefore have no incentive to reign in spending. 90% of State Revenue comes from the oil industry.

Mass. has been called Tax-achusetts throughout my lifetime. They may have a flat rate but they have lots of things to tax.

The question for any State (or federal) government is what do you get for your dollar? We get precious little from our Federal government. Most dollars spent could be better spent by a competitive private sector doing the same job.

Scott Sumner writes:

True but misleading. Massachusetts recently had a statewide referendum on changing the constitution to allow a progressive income tax. We were told it would only raise taxes on a tiny number of rich people. And the voters rejected it. The same liberal voters that overwhelming supported Obama.

David R. Henderson writes:

@Scott Summer,
Notice what you said: The voters rejected it. Your post was about the GOP, which I took to mean Republican politicians.

Bostonian writes:

Scott Sumner wrote, "True but misleading. Massachusetts recently had a statewide referendum on changing the constitution to allow a progressive income tax. We were told it would only raise taxes on a tiny number of rich people. And the voters rejected it."

I think Scott Sumner is confusing MA with some other state. There has been no referendum on a progressive income tax in MA since 1994 to my knowledge.

Bryan Willman writes:

The last attempt to pass an income tax in WA state (which may or may not have passed state constitutional muster) was backed heavily by very wealthy types (Bill Gate's father, etc.)

And got blown out of the water. Not out of a "love for the rich" but out of a need to restrain.

WA continues to elect relatively liberal democrats to most key positions, but also renews an initiative requiring 2/3rds passage of the legislature or a referendum to raise taxes. The repeating initiative to restrain taxes is more popular than any politician or party.

Some observers claim there is something wrong with this, I think it's a feature. Just as government divided very evenly at the federal level is a feature not a problem. (In other words, deadlock is better than any "efficient single party" arrangement.)

It's also worth noting that WA, and one imagines other states, is "blue" only on the basis of 1 to 3 counties (basically Seattle metro) and even there the swing isn't huge. A feasible shift in Seattle metro and the state would flip "red" in a millisecond.

(And one supposes that some "red" states might flip "blue" under similar cirumstances.)

And finally, some pretty "red" counties voted FOR gay marriage and FOR marijuana decriminalization.

I think 'red' and 'blue' and 'liberal' and 'conservative' and sometimes 'libertarian' are terms that mean less and less with time.

B.B. writes:

I moved from Pennsylvania to Massachusetts in 1992. In 20 years here, I saw one attempt to change the constitution to get a GRIT (graduated rate income tax). The demogagues had a slogan: "Raise Bill Weld's taxes, not yours." Weld was a wealthy Republican governor. Oddly, the slogan did not say to raise Ted Kennedy's taxes.

The people rejected the GRIT. At the same election, the people passed an amendment outlawing rent controls, a vote which sent Harvard grad students in Cambridge weeping.

Don't forget the property tax rebellion of some decades ago.

Mass voters are a lot more "conservative" than Ivy academics would have you believe.

Interesting, Pennsylvania, which is becoming "Bluer" all the time, has a simple flat tax system. Florida, Washington, New Hampshire, and Nevada all voted for Obama, but none have a personal income tax.

John David Galt writes:

Daniel and B.B. both have only part of the list.

These states have no personal income tax:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

Special cases:

Alaska - the only state with no state sales OR income tax, though some cities have sales taxes. State's main source of revenue is oil leases on state owned land (arguably not a tax).

Florida - has a personal property (wealth) tax instead.

Nevada - main source of revenue is taxes on the gambling industry, though they do also have a sales tax comparable to California's.

New Hampshire and Tennessee - both do have personal income taxes but only on investment income; wages are excluded.

South Dakota and Wyoming - somewhat like Alaska (small populations and lots of oil revenue to tax).

Texas - main source of revenue is high property taxes.

Utah - has both sales and income taxes, but rates are low primarily because the Mormon church operates its own welfare system for members, thus relieving the state of most of that burden.

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