MASSACHUSETTS AUTOMATIC INCOME TAX AND LONG-TERM CAPITAL GAINS CUT LIKELY ON JANUARY 1

By Bob Katzen

Sufficient economic growth in 2018 under the terms of a 2002 law may result in a tax cut for millions of Bay State taxpayers in 2019. The cut would come from a reduction in the income tax rate and long-term capital gains tax from 5.1 percent to 5.05 percent effective January 1, 2019.

These tax cuts do not need the approval of the Legislature. They are part of a system devised by the Legislature when it approved a $1 billion-plus tax hike package in 2002. The package set the long-term capital gains tax at 5.3 percent and froze the income tax rate at 5.3 percent instead of allowing it to drop to 5 percent in January 2003 — a reduction that was approved by voters in 2000. The 2002 law also includes an automatic trigger that reduces both taxes by one-half of 1 percent each year if certain goals are met, including if revenue from the prior fiscal year grew at least 2.5 percent faster than the rate of inflation.

“Next year will mark 30 years — three decades — since the state income tax rate was ‘temporarily’ hiked from its historic 5 to 5.95 percent, only ‘for 18 months’ we were promised back then,” said Chip Ford, Executive Director of Citizens for Limited Taxation (CLT). “We’ve been fighting to roll it back ever since. Despite windfall revenues and profligate spending there was never ‘enough revenue’ to keep the promise.”

“CLT pursued two ballot question petition drives to help the Legislature keep its promise, in 2000 winning the ballot vote with 59 percent,” Ford added. “Two years later the Legislature arrogantly froze it, ignoring the voters and replacing their mandate with ‘triggers.’ [Former CLT Executive Director] Barbara Anderson died before ever seeing the “temporary” income tax hike return to 5 percent. Three decades later, with revenue again pouring in, it’s still not complete. Maybe it’ll finally return to 5 percent before more of us are dead and gone?”

“Massachusetts stands to lose over $80 million in this fiscal year alone, and over $160 million in the next fiscal year from this impending .05% rate reduction,” said Revenue Committee chair Jay Kaufman (D-Lexington). “These losses will compound, year after year, just as the previous rate reductions have. This reduction in the income tax rate is required by a 16-year-old law that did not anticipate the economic realities of today. The infrastructure needs and demands of the commonwealth have only increased since its passage and we have habitually underfunded critical services—transportation and education [are] high on the list.”

Kaufman continued, “Reducing the amount of revenue coming into the state is unwise particularly at this time as we anticipate further cuts in federal funding due to the recent federal tax reform. Reduced state revenue and federal aid will disproportionately hurt middle and low-income people while the state and federal cuts will disproportionately benefit the wealthy. That’s not good tax policy. I hope my colleagues take up this fight in earnest in this coming session.”

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