Accountability needed for state tax breaks

Annual caps on these expenditures would be a good first step

ACCOUNTABILITY IS A PRINCIPLE embedded in the process of government budget-making. The Governor proposes a spending plan and the Legislature examines it, determines how to meet the needs of the public, and how much revenue is needed to do it. Those programs then can be audited by the state auditor. There is another spending program, however, that escapes this annual scrutiny – the wide range of exclusions, deductions, credits, and deferrals embedded in the tax code. Billions of dollars are spent by Massachusetts this way each year, but without the accountability of the budget process. After a false start a few years ago, there is now a process to remedy this.

The Massachusetts Tax Expenditure Review Commission recently began its review of the goals and effectiveness of expenditures on the books in the Commonwealth. Commissioners—led by the Department of Revenue (DOR) and comprised of analysts and appointees of the governor and the Legislature, including ourselves—opened the black box of tax expenditures to begin to determine whether these tax dollars are used wisely.

There are more than 200 personal and business expenditures on the books across income, corporate, sales, and other taxes. This month the commission finalized the review of 26 of those related to commerce, energy, research, and development. Some expenditures make sense. They encourage preferred activities, like nature conservation and economic competitiveness, or aid taxpayers in special circumstances, such as low-income individuals or dairy farmers whose industry we want to bolster. Student loan interest, college savings, and more are also part of our system of tax expenditures.

But others are rendered obsolete by industrial change or revisions to the federal tax code. They are inefficient, ineffective, or represent just plain poor policymaking. For example, alcoholic beverages, except those sold as part of a meal, are exempt from the sales tax. Yet the wholesale tax rate on alcohol in Massachusetts raises less revenue than the retail sales tax would, and it is far less than most in the country. While avoiding double taxation on alcohol, applying a wholesale rate that is less than the retail sales tax rate is costing the state $120 million annually.

In its report, the first in a series of annual reports, the commissioners expressed support for a more focused use of taxpayer dollars. For example, administering a cap on the cost of certain expenditures makes a program more like regular spending. And, we already have models to follow. The Massachusetts life sciences tax credit and the economic incentive development program, as well as the historic rehabilitation credit, cap the expenditure at a limit set annually by the Legislature and require an application by a taxpayer seeking this tax break. This ensures the tax benefit also provides a community benefit and crucial elements of transparency and integrity.

The Tax Expenditure Review Commission of 2012 also endorsed this concept, but its recommendations were never adopted by the Legislature. Senator Hinds has filed a bill that would establish this process for tax expenditures moving forward. The bill also calls on DOR to establish uniform guidelines for approving tax expenditures to promote best practices.

In an effort to bring more accountability, the state should also consider giving the authorizing agencies more discretion to allocate credit amounts to projects that are most beneficial to the Commonwealth. A credit program structured in this manner would provide more focus for taxpayer dollars and more revenue for priority investments that support businesses and workers. DOR’s annual tax expenditure report highlights 44 corporate or other expenditures worth more than $1.5 billion. Many are claimed without any assessment of need. A cap and review of only the largest expenditures could keep hundreds of millions of dollars in the budget while increasing effectiveness.

Massachusetts is moving in the right direction of best practices related to transparency and accountability in government spending. In 2018, the legislature required a rolling review of all tax expenditures the Commonwealth permits, and the commission we are a part of is the start of that robust process.

Meet the Author

Suzanne Bump

Auditor, State of Massachusetts
Meet the Author
It is time to take the next step in accountability, and the commission’s report tells us how we might do it. Our tax expenditure review should facilitate a conversation amongst state lawmakers around new tax policy that is more targeted toward specific economic and societal goals. Every dollar we spend in tax breaks is a dollar not spent on childcare access and affordability, educating our children, providing reliable public transportation, or fixing our crumbling infrastructure. We owe it to the residents of Massachusetts that every hard earned tax dollar is used wisely and efficiently.

Suzanne Bump is the state auditor of Massachusetts and Adam Hinds is a state senator from Pittsfield.