It took only two decades — two decades! — but Massachusetts taxpayers will finally have the state income tax rate they once demanded.
The tax rate will drop from 5.05 percent to 5 percent on Jan. 1, fulfilling the will of voters who first approved the new rate through a 2000 ballot question, state officials said Friday. The change will mean the taxpayers will keep, and the state will forgo, a projected $88 million this fiscal year and another $185 million the year after.
To the average taxpayer, the savings will probably be small. For example, someone who is single with no young children, rents their home, and has an income of $50,000 will keep an estimated $20 — the same amount when the income tax rate dipped this past January from 5.1 percent. Someone who is a head of household, a renter, and has two children under 12 on an income of $45,000 would save even less: $12.
Meanwhile, a married, home-owning couple with a $100,000 income and two young children stands to keep $39, while someone in the same situation but making $1 million would save $489, according to Governor Charlie Baker’s budget office.
The drop is part of a years-long, legislatively created process to more slowly phase in the decline from 2000, when voters decided to gradually knock the rate down from what was then 5.85 percent to 5 percent.
“It’s too little, too late — but better than nothing,” said Chip Ford, executive director of Citizens for Limited Taxation, which pushed the ballot question. Ford’s late partner, Barbara Anderson, was a driving force for that and other tax-reduction initiatives.
“It’s unfortunate that Barbara Anderson isn’t around to celebrate. It’s only taken 20 years,” Ford said.
The rate decrease, however, is not the only change in store. Thanks to the drop, taxpayers will again be allowed to claim charitable deductions on their state tax returns starting in January 2021. Voters had approved that deduction at the ballot box in 2000, too, but taxpayers were able to capitalize on it for only one tax year before the Legislature suspended it.
Jim Klocke of the Massachusetts Nonprofit Network said the change could provide a boost to individual charitable giving, which declined in 2018. And with that back in play, the state estimates it will cost it $64 million in revenue in fiscal year 2021, and roughly $300 million on a full-fiscal-year basis.
That means when both the deduction and the new 5 percent income rate are in effect for the full fiscal year 2022 — which runs between July 2021 and June 2022 — the state could forgo nearly $500 million in tax revenue.
“Starting in January, the income tax rate will be the lowest it has been in decades, allowing Massachusetts taxpayers to be able to keep more of their hard-earned money,” Baker said in a statement.
That, of course, also means less money the state has at its disposal to craft its annual budget, and some warned the compounding changes could put policymakers in a tightening bind.
With analysts forecasting slower revenue growth next year, the state also must find an additional $300 million each year through 2027 to put toward education, following a sweeping new school funding law. Lawmakers and advocates have also pushed the state to commit more funds toward the state’s aging public transit system — a call leaders in the House have said they’ll address through a new transportation financing bill in 2020.
“We’re now going to be stripping a half billion dollars from the Commonwealth’s budget at the same time we’re going to be making a long-deferred commitment to our education and transportation systems,” said Phineas Baxandall, a senior analyst for the left-leaning Massachusetts Budget and Policy Center. “It’s kind of difficult timing.”
But not all tax changes may be written in red ink. As sectors like the legal marijuana industry mature in Massachusetts, that could add to tax revenue, said Michael Goodman, executive director of the Public Policy Center at the University of Massachusetts Dartmouth.
Under Massachusetts law, customers can pay as much as a 20 percent tax on adult-use marijuana products, made up of a 6.25 percent state sales tax, a 10.75 percent state excise tax, and an optional 3 percent local tax. Medical marijuana purchases are not taxed.
Goodman also pointed to a potential surtax on income above $1 million, which supporters say could generate $2 billion in revenue should it pass muster with lawmakers and the courts before possibly going on the ballot in 2022.
After voters opted to slice the income tax rate in 2000, the first ticks downward occurred at the start of 2001 and 2002.
But amid a stormy financial picture, the Legislature stepped in, freezing the rate at 5.3 percent and passing a set of thresholds the state’s economy would need to meet each year for the rate to continue dipping toward 5 percent. The move meant the cuts would happen much more slowly than voters intended and only if the state’s economy was in good standing.
The complicated formula for triggering the tax cut included five steps. Among them: Revenue, adjusted for inflation, must have increased more than 2.5 percent from one fiscal year to the next.
The state has not hit the necessary benchmarks each year, so a tax cut has been no sure thing from one January to the next. The rate didn’t drop to 5.25 percent until 2012, and before declining again in January 2019, the last cut hadn’t come until 2016, when it dipped to 5.1 percent.
The state, however, has enjoyed a humming economy in recent years, and in fiscal years 2018 and 2019, the state ended its budget cycle with at least a $1 billion surplus.
Felicia Gans of the Globe staff contributed to this report. Matt Stout can be reached at firstname.lastname@example.org.