The New England Public Policy Center at the Federal Reserve Bank of Boston released a study in February examining the impact of local-option taxes on Massachusetts’ municipalities. This comes as cities and towns in Connecticut and across the country look for additional revenue sources to close budget shortfalls and reduce their reliance on property taxes. The study analyzes the fiscal implications of Massachusetts’ recently enacted local-option meals tax and potential local-option sales, income, and payroll taxes. It uses Geographic Information System maps to illustrate how local-option tax capacity varies geographically across the state.
The study finds that while local-option taxes provide some towns with considerable new revenue sources, they are likely to exacerbate fiscal disparities. This is because low-income, property-poor towns lack the tax bases for new local-option taxes. The study also finds that the municipalities subject to the fewest cuts in state aid in FY 09 had the most to gain from the new local-option taxes. Those subject to the largest state aid cuts would not be proportionally compensated for their loss in aid.
The author suggests that the state could reduce these fiscal disparities by changing its existing aid formulas to target towns with the lowest local-option tax capacity.
