Massachusetts Lawmakers Examine “Fairness” of State Tax Code
Monday, March 03, 2014
Highlights of the commission's draft report last week included the institution of a graduated income tax — a change necessitating a constitutional amendment, and one that has been defeated in Massachusetts before.
Commission looks at who pays, how much
Established by the Legislature last year, the bipartisan commission was charged with analyzing and focusing on the equity of current tax policies. The 15-member body found the “overall tax system in Massachusetts is regressive, meaning middle- and low-income taxpayers pay a larger share of their income in taxes than high-income taxpayers.”
The commission reports the share paid in state and local income taxes was inversely proportional to households' incomes: the bottom 20 percent of households paid 10 percent while the top 1 percent of earners paid 4.9 percent.
That regressivity is largely because of property and sales tax, areas where lower income households spend a greater share of their income. While Massachusetts has a flat personal income tax, various exemptions, deductions, and credits create some relief for lower wage workers.
Pushback against graduated income tax
Responding to the commission's recommendations, Barbara Anderson with Citizens for Limited Taxation called the graduated income tax an attempt to “rig the Massachusetts Constitution in favor of easy income tax hiking.”
“A graduated income tax is a tool to divide and conquer taxpayers, hiking taxes one bracket at a time,” said Anderson, CLT's executive director. “By targeting a single bracket, enough critical mass will never be reached for effective tax resistance. And, without legislative cooperation, a constitutional amendment is forever.”
Anderson's organization was founded in 1974 to oppose a graduated income tax proposal that failed at the polls in 1976.
Because of a 1915 amendment to the state's Constitution requiring a tax be “levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property,” a graduated income tax change necessitates a public referendum.
The proposal has been voted down five times: in 1962, 1968, 1972, 1976, and 1994, each time by at least a two to one margin.
Massachusetts in the minority of flat tax states
Two-thirds of states have a progressive income tax today according to a recent tally by the Federation of Tax Administrators, looking at state rates at the beginning of this year. Eight states have a flat income tax versus 33 (plus the District of Columbia) that have separate rates based on income brackets. (Seven have no income tax, while two only tax dividends and interest income).
While Massachusetts currently has a 5.2 percent income tax on paper, that percentage is not paid at any income level because of exemptions, deductions, and credits: The bottom 20 percent (earning less than $21,000) contribute 0.7 percent of their income toward state and local taxes while top earners pay 4.5 percent.
Members of the commission voted individually on each proposal at its final meeting last week.
Michael Widmer, a member of the committee and president of the Massachusetts Taxpayers Foundation, voted against the graduated income tax measure, saying it would undercut the creation of jobs and be counterproductive toward the goal of a more competitive economy.
A majority supported a package of reforms to reduce the tax burden on low- and middle-income households (which included an increase to the state's earned income tax credit, an expansion of the property tax circuit breaker to include low-income households, and a doubling of current exemptions — all offset by an increase in the flat income tax rate).
Members of the commission also supported an online sales tax, meanwhile, that would seek to collect revenue from all Internet sales should Congress implement that requirement.
Some of the commission's recommendations echo proposals by Gov. Deval Patrick last year, including an increase in the income tax and personal exemptions, which were not acted upon in the Legislature.
Taxes a small percentage of cost of business
Gregory Sullivan, a member of the commission and research director of the Pioneer Institute, recommended studying ways to increase economic competitiveness through an expanded research and development tax credit and lower corporate tax rate, but that proposal was not picked up.
The commission reported the average cost of state and local taxes in Massachusetts at 2 percent of the total cost of business, while employee compensation accounts for between 40 and 80 percent of expenses. “Therefore, a simple reduction in the corporate tax rate is unlikely to lead to significant change in the Commonwealth,” the report concludes.
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