Taxes in Massachusetts

Selective Sales Taxes

Selective sales taxes, also called excise taxes, are taxes that are collected on the sales of particular classes of items. The majority of these are taxes on alcoholic beverages, tobacco products, or gasoline and other fuels. These taxes are usually determined not by the value of the item being sold as with the general sales tax, but by the amount of the item being sold: a pack of cigarettes, a gallon of gas, a gallon of beer, etc.

Selective sales taxes are usually stable in the short term, but will tend to decline as a revenue source over the long term, since the tax per unit is usually not adjusted for inflation at frequent intervals. Often the benefit of these taxes is calculated not only in regard to their value as revenue sources, but as ways to discourage the use of the items taxes. The taxes on alcoholic beverages and tobacco products are often referred to as “sin taxes.” The revenue from the gasoline tax is usually dedicated to highway upkeep and repair, making it a kind of a highway user’s fee. Similarly, the taxes on alcohol and tobacco are often explained as needed to off-set the increased use of public health facilities by alcohol and tobacco users. However, because of the vertical equity issues discussed below, this form of funding tends to fall more heavily on low-income users of government services than on high-income users.

Vertical equity is violated by most selective sales taxes since lower income persons will tend to spend a greater proportion of their incomes on things like gasoline, alcohol, and tobacco products, making these taxes regressive in their effect. In addition, horizontal equity is violated since some individuals will use more of the items subject to selective sales taxes — for instance smokers are the only ones who pay the tobacco tax and people with long commutes will end up paying more in motor fuels taxes.

A Brief History of Massachusetts Selective Sales Taxes

The gasoline tax was adopted in 1929. It was set at 21 cents a gallon in 1991 and has not changed since.²⁶

The tax on alcoholic beverages was adopted in 1933 (after the repeal of Prohibition). The tax on distilled spirits (liquor) is currently $4.05 a gallon; wine is taxed at 55 cents a gallon; and, beer is taxed at 11 cents a gallon. The taxes on alcoholic beverages have not changed in over 20 years.²⁷

The tax on cigarettes was adopted in 1939. It has increased over the last 15 years from 26 cents to $1.51 a pack. This increase brought an additional $360 million to the state in fiscal year 2007.²⁸ In 2008, the cigarette tax was increased further to $2.51 a pack. This increase is expected to raise approximately $280 million in additional revenue in FY09.

How Massachusetts Measures Up in Motor Fuels Taxes

Massachusetts collected $674.6 million in motor fuels taxes, including gasoline taxes, in fiscal year 2006. This was 1.6 percent of state and local own-source revenue, and 2.2 percent of state and local taxes. This tax was collected entirely at the state level.

Motor fuels tax revenue in Massachusetts was equal to 0.23 percent of personal income in fiscal year 2006. Only three states collected less revenue as a share of personal income from motor fuels taxes than Massachusetts (see Table 8).

For the 50 states, motor fuels taxes accounted for 0.35 percent of personal income in fiscal year 2006. The state with the highest share of personal income going to the motor fuels tax was Montana with 0.73 percent. New York collected 0.06 percent of personal income in motor fuels taxes for the lowest share.

Effect of Motor Fuels Tax Changes in Massachusetts

Each one-cent change in the motor fuels tax (21 cents a gallon) in Massachusetts would be worth about $32 million.

How Massachusetts Measures Up in Alcoholic Beverage Taxes

Massachusetts collected $69.5 million in alcoholic beverages taxes in fiscal year 2006. This was 0.16 percent of state and local own-source revenue, and 0.23 percent of state and local taxes. This tax was collected entirely at the state level.

Alcoholic beverages tax revenue in Massachusetts was equal to 0.02 percent of personal income in fiscal year 2006. Massachusetts ranked 40th in share of personal income collected from alcoholic beverage taxes (see Table 9).

For the 50 states, alcoholic beverages taxes accounted for 0.05 percent of personal income in fiscal year 2006. The state with the highest share of personal income going to the alcoholic beverages tax was Alaska with 0.15 percent. Four states — Iowa, Maryland, Oregon, and Wyoming — collected about 0.01 percent of personal income in alcoholic beverage taxes.

Effect of Alcoholic Beverages Tax Changes in Massachusetts

Alcoholic beverages are taxed at different rates depending on the type of beverage. Each 10 percent increase in all alcoholic beverage rates in fiscal year 2009 would be worth about $7.5 million.

How Massachusetts Measures Up in Tobacco Taxes

Massachusetts collected $435 million in taxes on tobacco products, including cigarettes, in fiscal year 2006. This was 1.0 percent of state and local own-source revenue, and 1.4 percent of state and local taxes. This tax was collected entirely at the state level.

Tobacco tax revenue in Massachusetts was equal to 0.15 percent of personal income in fiscal year 2005. Massachusetts ranked 24th in share of personal income collected from tobacco taxes (see Table 10).

For the 50 states, tobacco taxes accounted for 0.14 percent of personal income in fiscal year 2006. The state with the highest share of personal income going to the tobacco tax was Rhode Island with 0.37 percent. Tobacco producing states had the lowest taxes on tobacco products, and South Carolina collected only about 0.03 percent of personal income in tobacco taxes.

Recent Tobacco Tax Changes in Massachusetts

The tobacco tax rate increased from 26 cents a pack to $1.51 a pack between 1992 and 2002. This increase brought an additional $360 million to the state in fiscal year 2007. In 2008, the legislature further raised the tobacco tax to $2.51 a pack. This $1.00 per pack tax increase is expected to raise about $280 million in revenue in FY09. However, an increase of this magnitude will add significantly to the overall cost of the product itself. This means that the behavior of purchasers will be affected by the tax increase, in this case by buying fewer cigarettes at the higher tax level. It is estimated that with reduced demand, the increase in the cigarette tax will result in approximately $150 million in increased tax revenue. The last cigarette tax increase enacted in Massachusetts, from 76 cents a pack to $1.51 cents a pack in 2002, was followed by a decline of 19 percent in taxed cigarette sales in the Commonwealth.

Another $1.00 per pack increase in the cigarette tax would be about the same percentage increase in the overall price of cigarettes as the 75 cent increase was in 2002, and probably would have a similar effect on consumption. This might then be expected to lead to a 19 percent decrease in the $280 million in new revenue expected — or $53 million — plus a 19 percent drop in the existing collections — or $80 million. If these effects are accounted for, the net increase in cigarette tax collections would be about $147 million. Assuming that revenue on other tobacco products increased in the same proportion, the total increase in tobacco tax revenue would be $154 million. However, revenue in the first year would likely be a bit higher because of how it would be collected. That is, it is likely that there would be an inventory tax that would apply the new higher rate to wholesalers’ inventories on the date of enactment.

²⁶ Massachusetts General Laws, Chapter 64A. Taxation Of Sales Of Gasoline.

²⁷ Massachusetts General Laws, Chapter 63A. Taxation Of Certain Corporations, Associations And Organizations Engaged In The Sale Of Alcoholic Beverages. The Council of State Governments, The Book of the States, various editions.

²⁸ General Laws Of Massachusetts Chapter 64C. Cigarette Excise.