Income tax rate to drop to 5%

AMANDA SABGA/Staff photoGov. Charlie Baker

The Massachusetts income tax rate will finally drop to 5% at the beginning of the new year — more than two decades after voters passed a referendum to roll back the rate to that level.

State revenue officials, who are crunching numbers for next fiscal year's budget, say projections for the coming year will likely trigger a reduction in the personal income tax rate from 5.05% to 5% beginning in January.

It will be the second year in a row that the personal income tax rate will be lowered.

Gov. Charlie Baker said the drop means 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."

Lt. Gov. Karyn Polito said the income tax cut "reflects steady economic growth and will provide a well-deserved break to Massachusetts workers."

The income tax rate was supposed to have fallen to that level years ago, under a ballot question approved by voters in 2000, when the rate was 5.85%.

Two years after its passage, however, the Legislature outraged supporters of the rollback by freezing the personal income tax at 5.3% to plug budget shortfalls.

Amid a backlash, lawmakers created a mechanism to reduce the tax rate if growth in the state’s annual revenue met certain benchmarks.

So far, tax cuts have been triggered just five times, most recently in 2019 when the rate fell by one-half percent to the current level.

"Finally, it’s going to go back down to 5% as promised," said Chip Ford, executive director of Citizens for Limited Taxation. "It took two decades, but that’s Beacon Hill."

The group, which was founded by anti-tax advocate Barbara Anderson from Marblehead, fought to put the question on the 2000 ballot and railed against lawmakers for freezing the rate decrease.

Ford said it's sad that Anderson, who died of leukemia in 2016, didn't live long enough to see the rate drop to 5% as mandated by voters.

"And to think about the billions of dollars that the state government has siphoned from taxpayers' wallets during all those years," Ford said. "It's disgraceful."

Republicans, including Senate minority leader Bruce Tarr, have filed bills every legislative session to lower the rate, but their proposals have been stymied in a Legislature controlled by Democrats.

Lawmakers who oppose dropping the rate say the state would take a major hit, with less money for schools, transportation and other needs.

Income tax collections represent more than 58% of the revenue used to keep state government running.

Lowering the personal income tax rate to 5% would mean a $80 million hit to the state next year and $185 million in 2021, according to the Department of Revenue.

Despite the slowly declining rate, personal income tax collections have increased from $14.4 billion in 2015 to more than $16.6 billion this year.

Even with the expected reduction, revenue officials and economists project overall tax collections to grow to more than $17.2 million next year.

The anticipated change in the tax rate comes as Beacon Hill Democrats search for new sources of revenue to fund education and transportation initiatives.

Meanwhile, Democrats and a coalition of unions and activists have renewed an effort for a 4% income surtax on households with annual incomes above $1 million.

Baker pitched a plan to double the state income tax exemption for dependents from $1,000 to $2,000 as part of a supplemental spending bill.

The break would have benefited taxpayers with children or who care for dependent relatives who are elderly or have a disability, according to the Baker administration. But the Democratic-controlled Legislature pulled Baker's "working families" tax proposal out of the $542 million spending bill before approving it.




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