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January 18, 2013 / needhamgrassroots

What’s “fair” in taxes? and the Governor’s Proposal [2013]

From Mass Budget — The current tax structure in Massachusetts is regressive; middle and lower-income people pay a larger share of their household income in taxes than do higher-income people (see this MassBudget factsheet.)

This flaw in our tax system is in part due to the regressive nature of the sales tax (see chart below.)

While higher-income households are able to save a portion of their income, lower income households typically must spend all they earn simply to make ends meet, with the result being that a much larger share of their income is subject to the sales tax (see MassBudget’sTax Primer.)

The income tax is the only major component of our tax system that functions to reduce overall regressivity (see this MassBudget factsheet.)

While Massachusetts applies a flat 5.25 percent rate to taxable income regardless of the income level of the taxpayer, a number of features of the Massachusetts income tax produce the markedly progressive net effect seen in the chart above. Two of the more notable of these features are the “Low Tax/No Tax” status, which exempts households with very low income from the income tax, and the automatic personal exemption (PE). The PE applies to all tax filers and removes a set amount of income from taxation ($4,400 for single filers and $8,800 for married couples). This means that for low and moderate income families, a relatively large share of household income is not subject to the income tax. For high-income filers, however, the fixed value of the personal exemption removes only a small share of their total income from taxation. The net effect of the PE is therefore progressive.

THE GOVERNOR’S PROPOSAL

The Governor’s newly announced plan for increased public investments in education and infrastructure includes a proposal to raise an additional $1.9 billion in annual revenues, and to do this in a way that reduces the tax system’s overall regressivity. As a result, the system would move somewhat closer to a flat-tax structure, where people at all income levels pay the same share of their income in taxes—and away from the current, markedly regressive structure. While the Governor’s full revenue package is composed of many pieces, in this factsheet we look briefly at just a few of the major elements of the plan.

The Governor has proposed decreasing the sales tax from the current 6.25 percent to 4.5 percent. Costing the Commonwealth roughly $1.4 billion annually, this change will lower the taxes of people in all income groups. Given that the sales tax is regressive, as discussed above, any reduction in the sales tax rate will disproportionately benefit low and moderate income households. As a result, this change will reduce the regressivity of the tax system.

The Governor also has proposed increasing the tax rate on personal income from 5.25 percent to 6.25 percent. This change will generate an estimated $2.6 billion in new, annual revenue for the state. Because the Massachusetts personal income tax is progressive in its effects, as discussed above, this change will be progressive.

Additionally, the Governor proposes doubling the automatic personal exemption (PE), from $4,400 to $8,800 for single filers and from $8,800 to $17,600 for married filers. This change will cost the state an estimated $1.1 billion annually and will help reduce overall tax regressivity.

The Governor’s proposal also eliminates a number of specific existing personal income tax exemptions and deductions. The eliminations of tax expenditures recommended by the Governor would raise approximately $1.3 billion. Together with the proposed increase to the personal exemption, the net revenue gain from these two reforms would be about $240 million—a relatively small portion of the overall tax reform package.

The Governor proposes a number of changes to business taxes as well:

  • Elimination of the FAS 109 deduction, a tax break that effects a small number of large corporations and would cost the state an estimated $76 million annually.
  • Clarification of apportionment rules governing the sourcing of the sale of certain services by companies headquartered outside of Massachusetts to customers inside the state. Currently, some multistate companies are asserting that they do not need to count these as Massachusetts sales when they calculate their Massachusetts taxes. The new rules would require them to include these sales when calculating their income for tax purposes. The flip side of this tax code clarification is that Massachusetts-based companies selling these services to out-of-state customers would not have to count them as Massachusetts sales in their tax calculations.
  • Elimination of an antiquated, special tax classification for “security corporations” that currently are taxed a lower rate than other businesses.
  • Elimination of a separate classification and tax rate for utility companies, instead taxing these businesses at the standard corporate rate.
  • Application of the sales tax to custom modifications made to “canned software” and to related computer services (many of the consumers of which are businesses).

In addition, the proposed reduction in the general sales tax rate will reduce the sales taxes paid by businesses on many of their purchases.

Finally, the Governor proposes indexing the gas tax rate to inflation, preventing further erosion in its value.

Read More: Massachusetts Budget and Policy Center – A First Look at the Governor’s Proposals on Education, Transportation, and Revenue (1/18/2013) – http://s.shr.lc/W564pu

MORE READING on the Gov.’s Revenue Proposal:

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