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(Photo by Michael Dwyer / Associated Press)
In his seventh State of the Commonwealth address this week, Massachusetts Gov. Deval Patrick
unveiled his bold plan to modify the current tax code
to raise an estimated $1.9 billion to pay for future investments in infrastructure and education.
Patrick, without concerns over re-election considering his announced intention to move on to other things following his term, announced Wednesday his plan for increasing the state's 5.25 percent income tax to 6.25 percent while slashing the sales tax rate from 6.25 percent to 4.5 percent.
The proposal, which would need approval from the legislature to become law, would have a varying effect on families in the Bay State, depending on income and spending habits.
Karl Petrick, an associate professor of economics at Western New England University in Springfield, says the proposal has the potential to help earners at the bottom of the pay scale while.
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"Right now, the state income tax doesn't apply to the first $4,400 anyone makes and the governor's proposal would double that to include the first $8,800," Petrick said. "There is no doubt that would help those low-income earners and the impact on the highest earners wouldn't affect them to a significant degree."
According to the U.S. Census Bureau, the median household income in Massachusetts is $65,981. Assuming there are two earners contributing to such a household figure and both work in the Bay State, their total state income tax contribution would grow to about $1,400 a year compared to $1,176- an increase of approximately $483 dollars when not taking the 45 income tax deductions proposed for elimination into account.
A household bringing in $40,000 annually with two earners working in Massachusetts would be paying $1,950 instead of $1,638- a difference of $224.
But a household bringing in $500,000 with two earners working in the state would see their state income taxes grow to $30,150 from $25,326- an increase of nearly $5,000.
"The lower the income level, the more someone feels a tax hike. The federal tax system is tiered based on income but the state constitution says the income tax rate must be standard across the board, so the governor did the best he could with the legal constraints," Petrick said. "The people who can afford to pay more will and those who can't afford a tax hike will be protected to a degree. The wealthy will still have more money than they did five years ago, regardless of the tax hike."
This chart, provided by the Massachusetts State Office of Administration and Finance, breaks down the impact they say the proposed changes in the tax code would have on citizens at different income levels.
But not everyone shares Petrick's train of thought on the higher income tax rate.
Paul Craney, executive director of the conservative Massachusetts Fiscal Alliance, said he believes it puts the commonwealth at a disadvantage among other New England states.
"The governor deserves credit for seeing the value in lowering the sales tax rate. However the logic that justifies a decrease for the sales tax should be applied to the income tax rate. Massachusetts is already competing with neighboring states like New Hampshire's zero percent income tax rate- this will only make us less competitive," Craney said in a statement. "Massachusetts taxpayers haven't seen such a high income tax percentage since the early 1990's; this is not a step in the right direction. Increasing the tax rate on hardworking families while coming out of an economic recession is not the proper approach."
Andrew Bagley, director of research and public affairs for the non-partisan Massachusetts Taxpayers Foundation, said his group is still looking at the proposals mentioned by Patrick to determine exactly where the final tally of an additional $1.9 billion in net revenue comes from.
"We've already spent a considerable amount of time trying to break down the numbers as this is a fairly aggressive change to the tax code. Philosophically we feel that user fees should pay for further investments in transportation, but we haven't taken a position on the overall proposal yet," Bagley said. "The governor said he wanted to eliminate 45 individual tax deductions, and there is a good chance that at least some of those are considered highly valuable to Massachusetts citizens. He hasn't said which deductions he plans to get rid of so we are waiting for the next level of detail from his office."
Later in the day, the state office of Administration and Finance held a conference call with reporters listing the various deductions proposed for elimination. They include seldom-used deductions such as payments made to coal miners to popular deductions, such as the tuition and charitable contribution deductions.
Gov. Deval Patrick's proposal for tax reform by
General Council David Sullivan said that although some deductions proposed for elimination seem to counter stated administration goals, such as improving access to higher education, it is "unfair" to judge the impact based on the line items alone.
"You can't look at any deduction in isolation-each one probably has its value to someone," Sullivan said. "With the doubling in the cut for taxable income and the lower sales tax rate, there is (a benefit). The governor thinks (these) tax deductions are an inefficient way to provide a break to citizens."
The governor's proposal to lower the sales tax rate two percentage points does stand to benefit anyone who purchases taxable goods in the state. But Petrick said that like the income tax hike, this shift stands to benefit the poor more than the wealthy.
"People in the lower income brackets tend to spend more of their income than they save, so a lower sales tax rate will help them every day," Petrick said."The other side of this is the proposed investments in transportation infrastructure like the Springfield-to-Boston commuter rail. Worcester, as an economy, isn't that different than Springfield but the unemployment rate is much lower. That type of project could help the poor and unemployed get to the eastern part of the state where the jobs are, which would change things here dramatically."
As one might expect, the Retailers Association of Massachusetts is excited about the potential impact of lowering the state's income tax rate by two percentage points, although cautious about what the actual legislative outcome will be.
"The sales tax rate has a major impact on our Main Street businesses here in Massachusetts and consumers alike. When we talk about sales tax rates here, we consider our tech-savvy consumers (shopping online) and the border with states like New Hampshire," said John Hurst, president of the retailers association. "The sales tax is a regressive tax and it is good tax policy to lower it to help lower and middle income families stretch their discretionary income. But we don't yet have a position on the overall proposal. The legislature will have to decide if we need that much new revenue and if the respective percentage increases and decreases are the right amount."
"Fact Sheet" on Gov. Patrick's proposed tax reforms, as provided by the state office of Administr... by