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That Tiny Reduction in State Tax Speaks Volumes

December 19, 2018

It may not seem like much, but the reduction of Massachusetts’ income tax rate from 5.1 to 5.05 percent says plenty about the state of this state’s economy.

That new rate, which takes effect on Jan. 1, will have a minimal effect on taxpayers, adding up to a little more than a few extra dollars in most residents’ pockets.

However, it’s evidence that a vibrant economy can continue to pump revenue into state coffers while at the same time giving some tax relief to those who pay the bills.

This reduction also signifies the penultimate step in fulfilling the will of the people, who in a 2000 referendum voted to reduce the state’s tax burden from 5.95 to 5 percent.

There have been plenty of bumps along the way to reaching that objective, in the form of roadblocks orchestrated by state lawmakers.

That referendum mandated a gradual reduction to 5 percent by fiscal year 2003, but legislators in 2002 revised that ballot measure in a statute that froze the rate at 5.3 percent until the state’s tax revenues -- adjusted for inflation -- grew for four consecutive quarters.

The Department of Revenue reported in August that the revenue benchmark had been achieved, which automatically initiated the rate reduction.

That decrease means $84 million less for the state budget for the remainder of the 2019 fiscal year, and $175 million over a full fiscal year. Though that pales in comparison to the state’s current $41 billion spending plan, it no doubt has many spendthrift lawmakers wringing the upturned palms.

“A strong economy and careful management of the commonwealth’s finances have created the conditions for Massachusetts taxpayers to get a much-deserved break,” Gov. Charlie Baker said in announcing the reduction on Friday. “We are pleased that next year we will see taxpayers be able to keep more of their hard-earned money.”

Under Baker’s financially prudent, business friendly administration, it’s been shown that regressive tax revenue can be replaced by an expanding, full-employment economy.

In fact, September’s tax receipts alone not only covered that $175 million loss, they easily exceeded it. The DOR indicated that preliminary revenue collections for that month -- $3.223 billion -- surpassed projections by $271 million. Through September, fiscal year revenue is almost 10 percent higher than the same period in 2017.

So, Massachusetts’ taxpayers are now within a single income-tax reduction of achieving the full benefit of that 2000 referendum.

Even at 5.05 percent, of the eight states with a flat income tax rate, Massachusetts will still be the highest, but the gap’s closing.

And another benefit of reaching that 5 percent income tax goal? The charitable giving deduction, suspended in 2001, will be restored.

Revenue-driven reductions in taxes have slowly chipped away at Massachusetts’ anti-business image -- to the benefit of all who work and live here.

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