BOSTON - As policymakers scrape every nook for dollars to help plug persistent budget deficits and revenue shortfalls, a panel of lawmakers yesterday opened a thick booklet of tax exemptions and credits — some decades old — to decide whether they still serve a purpose.
Tax exemptions on everything from the small and obscure — cement mixers and flag purchases — to the broad and all-encompassing — services — are in legislators' sights and were the subject of a hearing of a special subcommittee combing through the hundreds of tax breaks, deductions and credits.
The long list of exemptions, known as the "tax expenditure budget," is valued at $18.97 billion this fiscal year, according to an analysis accompanying the Patrick administration's fiscal 2010 budget. Lawmakers hope to weed through the exemptions to determine which still have value and which are outdated. It's not clear whether they'll attempt to draft legislative recommendations based on their findings.
Exemptions and credits exist in all categories of taxes, including income tax, corporate tax and sales tax. For example, many individuals may deduct business expenses from their gross income, and some corporations, such as nonprofits, are exempt from most forms of taxation.
Experts invited to speak by the subcommittee questioned the value of a sales tax exemption on services, which officials estimate saves consumers more than $6 billion a year on everything from haircuts to accounting work.
"I think it's crazy," said Karl Case, a Wellesley College economics professor. "What's the difference between a good and service today? I never quite understood why it's there."
Randy Albelda, a University of Massachusetts economist, said a policy exempting the sales tax on services emerged in the 1930s, when service taxes were considered "a direct tax on labor."
"That doesn't hold anymore. That doesn't serve its purpose anymore," she said. "Certainly, some services you don't want to tax. That's one that really could use some looking at."
As the panel, a subgroup of the Legislature's Revenue Committee, examines the tax expenditure budget with an eye on releasing a report early next year, the committee's one Republican member said he worried that changing or eliminating various exemptions would change consumer behavior in ways that could leave the state worse off.
"You go get a haircut and you get a $15 haircut and the tax is going to be $2.25. Where does the $2.25 come from? You. And where's that $2.25 not being spent?" said Rep. Jay Barrows (R-Mansfield) in an interview. "Are you going to get your hair cut every eight weeks instead of every four? How does your spending change? Are you going to eat more macaroni and cheese?"
He said any changes should be revenue neutral to ensure that consumption of services isn't reduced.
"If the consumer's mindset is they're going to seek services elsewhere or they're not going to purchase them, then what happens?" he wondered. "I don't want to look at these various sectors and say OK, this is a money grab."
Public Service Committee Chairman Robert Spellane, D-Worcester, who sat with the subcommittee, said he hopes to explore further how changes in the various tax expenditures could affect the public pension system.
Rep. Alice Peisch, vice chair of the Revenue Committee and head of the tax expenditure subcommittee, said it was unclear whether her panel would make recommendations or conclude that more information is necessary.
"I really think it's premature to make any kind of prediction as to whether we'll make any recommendations, no recommendations, I don't know," she said. "This has been an information gathering process."
