GOV. CHARLIE BAKER says the state’s individual income tax rate will drop to 5 percent at the beginning of next year, ending a two-decades-long march back to the level it was at in 1985.
The income tax rate was increased in 1985 and again in 1990, with politicians promising to lower it again when the economy improved. There was a small decrease in 1992 and another in 2000 before 59 percent of the state’s voters approved a ballot question directing that the rate be lowered to 5 percent in three years. That schedule was put on hold in 2002 by the Legislature, which authorized incremental drops in the rate as long as economic conditions permitted.
“Our administration is working to keep the Commonwealth’s economy strong while maintaining fiscal discipline and now we are finally making happen what voters called for almost 20 years ago,” Baker said in a statement.
The final reduction will cost the state $88 million this fiscal year and $185 million in the fiscal year beginning July 1. For individual taxpayers, the savings will be fairly minimal — $30 for someone making $60,000 a year.
The state has been flush with tax revenues for several years, but during deliberations this week over the close-out budget for fiscal 2019 the House’s top budget official called for putting more money in the state’s rainy day fund amid concerns the economy may be on the verge of a downward turn.
But the Baker administration is making no changes to its revenue forecasts, even with the drop in income tax revenue.
“Consistent increases in state revenue are triggering this final income tax rate reduction,” said Administration and Finance Secretary Michael J. Heffernan in a statement. “This is excellent news for Massachusetts taxpayers, and it was incorporated into our assumptions for FY21 so there is no change in our revenue outlook.”
As required by statute, the Baker administration is also restoring state tax deductions for charitable contributions as of January 2021. That will cost the state $300 million on an annualized basis.
“About half of that value [charitable deductions] goes to top 1 percent of income earners. These tax changes end up being regressive,” said Phineas Baxandall, a senior analyst at the liberal leaning Massachusetts Budget and Policy Center. “We just think there’s got to be adequate revenue so low and moderate income people shouldn’t be asked to pay more than their fair share.”
Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, said tax revenues aren’t static. Even with a drop in the income tax rate, other new sources of tax revenue have come on line, including taxes on marijuana, gaming, and temporary accommodations.
A short-term rental excise tax enacted in 2019 collects a 5.7 percent rooms tax. The state has projected it will collect $30 million in fiscal year 2021 from that source.
The November 2018 launch of recreational pot shops has also begun to yield big numbers, with officials forecasting about $67 million for the state from the 17 percent tax for the first year. State gaming revenue is at over $195 million for the year, according to MassGaming reports from November.
But even with those new sources come new responsibilities for the state. “There’s new commitments with the education bill, transportation safety and less regular revenue,” said Baxandall.
The education legislation commits the state to $1.5 billion in new aid for schools.
Advocates have sought additional ways to bring money in. The so-called Millionaires’ Tax, or Fair Share Amendment, which passed as a constitutional amendment in June, would create a 4 percent surtax on a portion of an individual’s income that exceeds $1 million. The measure requires another favorable vote during the rest of the two-year session, and ratification by voters in 2022. The campaign for higher taxes on the wealthy has been led by the coalition Raise Up Massachusetts.
“This income tax rate cut will give low-and middle-income people just $10 or $20 each year, but that’s a drop in the bucket compared to the cost of recent MBTA fare increases, or to the high tuition bills at our public colleges,” said Andrew Farnitano, a spokesman for the coalition.