The Massachusetts income tax rate dropped from 5.2 percent to 5.15 percent Thursday when the new year dawned.
A goodbye gift from Governor Deval Patrick? A parting favor from Senate President Therese Murray? No. It’s the legacy of voters’ outcry from 14 years ago.
In 2000, voters passed a ballot initiative incrementally knocking the rate down from 5.85 percent to 5 percent. The first ticks downward took place at the beginning of 2001 and 2002. But then the Legislature, facing tough economic times, froze the final tax cut.
Instead, legislators set a series of economic growth thresholds which would — much more slowly than voters intended — lower the tax rate to 5 percent, but only if the state economy was humming along.
Those triggers have been met twice in recent years and were met again in 2014, thus the tax rate drop on Thursday.
However, the change will not have a particularly wallet-fattening effect on average taxpayers.
A single person with two children who rents and makes $45,000 a year will see an average $12 cut in taxes, according to estimates from the state Department of Revenue.
A married couple who owns a home, has two toddlers and $100,000 in income will keep $39 more than they would have under the 2014 rate, the department estimated.
But the change will have a more pronounced impact on the $36 billion-plus state budget.
For the rest of this fiscal year, which ends June 30, Massachusetts will not collect an estimated $70 million in revenue that it would have had the rate stayed the same.
And in the next fiscal year, it will reduce revenue by about $145 million, according to projections from the Patrick administration.
It is important to follow the will of the voters, “but there are serious consequences from a budgetary point of view,” said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation.
The drop in revenue contributes to a significant budget gap — estimated by some outside specialists at a whopping $750 million — that Charlie Baker will face when he becomes governor on Jan. 8.
A Baker spokesman, Billy Pitman, said the fact that the economy is growing is a good sign for the state.
However, “the massive budget deficit facing the administration points to an underlying spending problem in state government. The governor-elect looks forward to implementing fiscally responsible budget policies to ensure Massachusetts’ economy continues to grow and taxpayers get the breaks they deserve,” Pitman said.
The complicated economic formula for triggering the tax rate drop includes five steps related to state tax revenue growth.
A key one: whether those revenues, adjusted for inflation, increase more than 2.5 percent from one fiscal year to the next.
Former House speaker Thomas M. Finneran, who was at the center of efforts to right the state budget in the early 2000s, said he and fellow legislators grappled to balance the prospect of draconian cuts to a wide array of services and respecting the will of the voters.
Freezing the tax cut ballot initiative law “was an attempt to find the right calibration between those two things,” Finneran said this week.
“We decided to let the income tax come down as the economy stabilizes and grows,” he said.
State Representative Jay R. Kaufman, a Lexington Democrat and the House chairman of the Joint Committee on Revenue, said he understands that the cuts are embedded in the law but also is cognizant of the costs.
“Taxes equal public services; therefore, tax cuts equal a cut in services,” he said, adding that the decrease in revenue will translate into less money for items such as transportation infrastructure, youth jobs programs, and aid to cities and towns.
“There’s basically no free tax cut,” Kaufman said, and, one way or another, “this one will be paid for.”
Advocates of lower taxes see it very differently.
Barbara Anderson, president of Citizens for Limited Taxation, a Massachusetts group that strongly advocated the 2000 ballot initiative, said the cut was part of a 25-year push to return the income tax rate to 5 percent.
In 1989, the state Legislature voted to increase the tax rate above 5 percent, triggering a long quest to bring it back down to that round number.
“At least they are still trying to honor a quarter-century promise to get it back to 5 percent. We’re not going to thank them,” she said Tuesday. “We’re going to say, ‘It’s about time!’ ”