Statutory income tax-lowering process now completed
The Baker-Polito Administration today announced that the state’s Part B individual income tax rate will be reduced from 5.05% to 5% effective January 1, 2020. This upcoming tax cut represents the conclusion of the statutory process laid out in a 2002 state law to lower the income tax rate to 5% based on certain state revenue milestones and will return $88 million in Fiscal Year 2020 and approximately $185 million in Fiscal Year 2021 to taxpayers.
“Starting in January, 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,” said Governor Charlie Baker. “Our Administration is working to keep the Commonwealth’s economy strong while maintaining fiscal discipline and now we are finally making happen what voters called for almost 20 years ago.”
“We are pleased that the necessary revenue benchmarks have been met and the income tax rate is being fully reduced to 5%,” said Lieutenant Governor Karyn Polito. “This tax cut reflects steady economic growth and will provide a well-deserved break to Massachusetts workers.”
The 2002 law provides that for each tax year in which certain inflation-adjusted baseline revenue growth requirements are met, the income tax rate will be reduced by increments of 0.05 percentage points until the rate reaches 5%. The legislation replaced a tax rate reduction schedule that had passed by ballot initiative in November 2000.
“Consistent increases in state revenue are triggering this final income tax rate reduction,” said Administration and Finance Secretary Michael J. Heffernan. “This is excellent news for Massachusetts taxpayers, and it was incorporated into our assumptions for FY21 so there is no change in our revenue outlook.”
Part B income includes wages, salary, and many other forms of income, including self-employment income; business, professional and farm income; S corporation distributions; and rental income from personal property. The rate associated with Part B income is also applied to several other income categories, including interest and dividends and most long-term capital gains.
There are five revenue tests that determine whether a rate reduction is required, beginning with growth in revenue over the previous fiscal year, and including a series of four additional growth measures. If anyone of the incremental tests is not met, the rate reduction does not proceed. With DOR’s certification of the most recent revenue measure, all five tests in 2019 have now been met.
The rate reduction was last triggered on Jan. 1, 2019, when it dropped from 5.10% to 5.05%. Previous rate reductions included:
- Jan. 1, 2012 (rate reduced from 5.3% to 5.25%)
- Jan. 1, 2014 (rate reduced from 5.25% to 5.2%)
- Jan. 1, 2015 (rate reduced from 5.2% to 5.15%)
- Jan. 1, 2016 (rate reduced from 5.15% to 5.10)
The state budget for Fiscal 2020 accounted for the income tax rate change, which is projected to reduce tax revenue by approximately $88 million in Fiscal Year 2020 and approximately $185 million in Fiscal Year 2021.
By statute, the state charitable deduction will also be re-instituted effective the following tax year, or January 1, 2021, because of this income tax rate reduction. The estimated cost is $64 million in FY21 due to this change, and approximately $300 million on a full fiscal year basis.