Governor Patrick’s stated goal in proposing about $2 billion in assorted tax increases is to make the system more “progressive.” Because Massachusetts is one of only seven states that impose the same tax rate on all taxpayers regardless of income, greater progressivity would be created not via a graduated rate structure but by doubling personal exemptions that provide greater benefit for low and middle income residents than for the wealthy when measured as a percentage of their income, and by lowering the sales tax rate while increasing the income tax rate.
But the governor’s plan would also eliminate 44 personal income tax breaks, most of which are “progressive” in an economic and political sense. They include tax deductions and exclusions for college tuition, childcare expenses, social security taxes, health savings accounts, adoption expenses, employee education costs reimbursed by employers, and dependents under 12. It would also eliminate incentives designed to encourage people to take in foster children, commute using public transportation, make energy improvements in or remove lead paint from their homes, and repair septic systems.
The governor has also recommended that the state “decouple” from the federal rule that excludes from income the gain from the sale of a principal residence. Currently the first $500,000 of gain for a married couple filing jointly is exempt. In eastern Massachusetts people working middle-class jobs such as firefighters or nurses could experience that sort of profit on a house they’ve owned for several decades. Under the governor’s plan, their tax bill would exceed $30,000.
Each of these tax breaks was designed to encourage “progressive” behavior or provide relief across the income spectrum, but most especially to low and middle income taxpayers who have the greatest need for it. The consequences for individuals and families will vary greatly depending on which tax breaks they would otherwise claim. But, in general, eliminating them tends to make the flat-tax system more regressive, not less.
It’s important to note that the 44 income tax provisions account for most of the money in the governor’s plan. The core of the proposal is to raise the state’s income tax rate from 5.25 percent to 6.25 percent, while cutting the sales tax rate from 6.25 percent to 4.5 percent. When the doubling of personal exemptions is factored in, the net revenue gained from the rate changes is only about $100 million. The real money raised — more than $1.3 billion— comes from eliminating these incentives that were enacted to advance progressive goals. Much of this money will come from middle class taxpayers.
A simple state tax system is an advantage to lower and middle income taxpayers who prefer to file their own tax returns without the help of a paid tax preparer. Yet decoupling will hardly simplify the system for those citizens. A number of the governor’s provisions require diverging from common federal tax rules, which will force taxpayers to refer to a laundry list of additions to their federal income when preparing their state tax returns.
Talk of tax hikes in the Commonwealth unites business leaders and like-minded politicians who are determined that the state not regain its 1980s moniker of “Taxachusetts.” The Patrick administration is dealing with this charge by moving the goalposts for benchmarking our tax climate against those of other states.
Under existing law we are roughly in the middle of the pack among the states in taxes as a percentage of personal income. But we will be above the average if the governor’s package is enacted. So the administration has shifted its strategy and is comparing Massachusetts only with “neighbors and industry competitors.” Those states, including New York, Maine, Vermont, New Jersey, California, Connecticut, and Rhode Island, happen to include seven of the 10 states with the highest tax burdens in the country, if you don’t include states like Alaska and Wyoming that export their tax burdens to extractive industries.
Patrick, hot on the heels of a national debate about taxing the rich and a local debate about the wisdom of “tax expenditures,” seems to have concluded that all tax expenditures are bad, when in reality many of them are perfectly consistent with a progressive worldview. Unfortunately, while trying to make the state’s overall tax burden more progressive, he’s proposing to eliminate many provisions that are valued by the people he’s most trying to help.Joseph X. Donovan, a former deputy general counsel of the Massachusetts Department of Revenue, is a tax attorney at Sullivan & Worcester.