State Tax Groups Find Flaws in Governor’s New Budget

Saturday, March 23, 2013

Ashley Klann, GoLocalWorcester Contributor

Two state tax policy groups, MassBudget and the Massachusetts Taxpayers Foundation, say that the Governor's new budget has room for reform, and that one of its measures could "open Pandora's Box."

Governor Deval Patrick revealed the proposed fiscal year 2014 budget earlier this year, and as discussion and mixed opinions continue, these groups say the proposal is in need of some amendments before the fiscal year begins on July 1.

“Pandora’s Box”

The Massachusetts Taxpayers Foundation says that the Governor’s proposed tax on computer and data procession services and custom software is a “Pandora’s Box” that would have serious negative implications on growing tech. and industry in the Commonwealth.

The group says this tax “raises numerous problems for virtually all businesses in the state, large and small, and seriously undercutting the state’s competitiveness.”

“At a minimum, the Governor’s proposal would tax an enormous swath of technological tools and services such as custom-designed websites, cloud computing, data storage, computer programming, and software installation,” they said in a recent release. “The proposed tax would send a strongly negative message to the very industry the state is trying to attract and stymie growth at those Big Data companies already based in Massachusetts, which the Governor’s office estimates employ more than 12,000 residents.”

Mass. has already slipped in terms of its business friendliness rankings and many say that the state has not helped reverse some recent negative measures. Massachusetts already has the second highest business costs in the country, behind only Hawaii. The state’s tax burden on businesses is the fifth highest in the country, according to the January 2013 report from the Greater Boston Chamber of Commerce. The state also ranks near the bottom for its difficult regulatory climate.

“A new tax on widely used technology will add to the costs for virtually every business in the state, including professional service firms, technology companies, and many other businesses that provide residents with good, high-paying jobs,” they said. “The proposal threatens to tax everything from the most basic technological services—for example, designing a custom website—to emerging innovations like health care diagnostics on mobile devices.”

The Massachusetts Taxpayers Foundation says that due to the pervasive nature of technology, all companies relying on this growing field and would be hurt by this new tax plan.

“Unclear and Complex”

The group is also bashing Patrick’s budget for its “unclear and complex” language in trying to regulate technology and data services.

“Computer services and data processing are abstract and hard to define, making the boundaries of this tax blurry and uncertain,” they said. “The current proposal uses nearly a dozen vague categories to describe computer and data processing.”

The constantly evolving nature of technology, they say, will only further complicate this issue in the future.

Budget Alternatives

MassBudget sees the Governor’s proposal as lacking some “fair” measures. They point out that Patrick has proposed paying for new investments in transportation and education with a tax increase – one that would raise an estimated $1.9 billion in new, annual revenue and would do so in a progressive manner, taxing mostly higher income households.

“Various elements of the Governor's proposal could be changed in ways that would raise the same amount of revenue in a similarly fair way,” they said.

In their alternative examples, the general structure of the Governor's actual tax package proposal is still there, and the personal income tax rate is raised from its current 5.25 percent, while the general sales tax rate is lowered from its current 6.25 percent.

“Unlike the Governor's proposal, each of our examples maintains, as a continuing part of the tax code, all of the 40-plus personal income tax breaks the Governor has recommended eliminating.”

The proposal they’re challenging includes a tax rate on all income is set at 6.25 percent while the sales tax rate is lowered to 4.50 percent. Forty-plus personal income tax breaks are eliminated, while the personal exemption is doubled, to $8,800 for single filers (S) and $17,600 for married couples filing jointly (MFJ).

Lower Sales Tax

One method MassBudget says would match the $1.9 billion revenue the Governor’s plan entails, includes the sales tax rate lowered to 5.90 percent (rather than to 4.50 percent), and no personal income tax breaks eliminated.

“Determining how much people at different income levels pay in taxes is important when considering the fairness of tax policy changes,” they said. “While most taxes in Massachusetts have a fixed rate—for example, the state has a flat 5.25 percent income tax—different income groups are affected differently by each tax.”

The group has hashed out three other scenarios that they say would meet the Governor’s projected increase in revenue, but be a more “fair tax.”

Another they suggest would raise the tax rate on most income to 6.25 percent (similar to the Governor's proposal) and, like the Governor has proposed, the personal exemption is doubled. They also suggest that the tax rate on short-term capital gains be left at its current 12 percent rate, rather than being reduced to 6.25 percent as proposed by the Governor.

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