Gov. Deval Patrick’s top budget officials drilled deeper into the governor’s tax reform proposal on Thursday, revealing how the plan to be filed with the governor’s budget next week would eliminate 45 personal tax exemptions and tie the 21-cent gas tax to inflation, costing drivers an extra half penny per gallon at the pump starting in July.
The proposal, which would begin dedicating all state sales tax revenue to transportation and infrastructure, would also rely on periodic increases in MBTA fares, highway tolls and Registry of Motor Vehicle fees to fund an administration-identified $1 billion a year gap in needed transportation improvements and available resources.
“The proposal, in its entirety, improves the fairness of the tax code," Administration and Finance Secretary Glen Shor said. "It takes a tax code that right now imposes a higher effective tax rate on lower-income tax filers, and a lower effective tax rate on higher-income tax filers, and flips that."
While the state’s Constitution prohibits a graduated income tax, Shor explained how the blend of tax policies recommended by Patrick, in their estimation, would fall disproportionately on wealthier individuals.
For instance, individuals earning $50,000 or less, and families of four with an income of $60,000 would see their tax burden stay the same or decrease, while those earning between $100,000 and $200,000 would pay roughly $1,000 more a year in taxes, and the wealthiest 5 percent earning above $200,000 would pay an additional 1 percent of their income. Additionally, the 270,000 individuals that don’t pay income tax because they earn too little would realize the benefit of a sales tax decrease without the additional income tax burden.
Patrick, in his State of the State address Wednesday, sketched out broad details of his proposal to generate $1.9 billion in new revenue for transportation and education with an increase in the income tax to 6.25 percent, and a decrease in the sales tax to 4.5 percent. He said the investments were critical to the state’s future economic strength.
Shor said, “We think even with these tax changes we are strong with our economic competitors,” noting how the new tax structure would increase the state’s tax burden as a percent of personal income, but push it higher than only one new competitor state – Pennsylvania – and leave Massachusetts positioned in the middle of states competing for similar business.
While the sales and income tax changes constitute the core of Patrick’s revenue proposal, the full plan contains a number of other changes to the personal and corporate tax code that will impact the bottom lines of businesses and families across Massachusetts.
Patrick plans to file his fiscal 2014 budget with the House next Wednesday. The tax changes contained would not go into effect until Jan. 1, 2014, decreasing the amount of new revenue that would be available to spend in the fiscal year that starts on July 1.
Left alone, the administration estimates the state would realize about $780 million in new revenue in fiscal 2014 from the changes, but officials are proposing to borrow against anticipated future revenue to net $1.1 billion in new revenue next year. The strategy would decrease the gains in future years, netting the state $1.6 billion in fiscal 2015, $1.7 billion in fiscal 2016 and the full $1.9 billion in fiscal 2017.
Shor said the borrowing strategy is a “commonly used” tool that would give the administration more money to spend next year, while also matching the state’s plan and ability to ramp up spending on transportation projects and education programs than can’t be started all at once.
By indexing the gas tax to inflation, Administration and Finance General Counsel David Sullivan said the state will generate about $13 million in new revenue next year. Documents provided by the administration show they anticipate the gas tax to rise from 21 cents to 24.6 cents in 2021, generating $118 million in additional revenue.
Though sales tax revenue alone will not be enough to cover what Patrick thinks is needed for transportation and infrastructure, his budget plan will rely on the gas tax, contributions from Massport, the Boston Convention Center and gaming revenue to close the divide.
Shor said the governor favors “periodic and consistent fare, fee and toll increases,” and supporting documentation shows how Patrick will recommend 5 percent fare increases at the MBTA every two years starting in fiscal 2015, 10 percent RMV fee increases every five years starting in fiscal 2016 and 5 percent toll increases every two years starting in fiscal 2015.
Shor said these increases will ensure that the value of the fares, fees and tolls don’t erode over time with inflation.
Unlike in past years when Patrick has called for applying the sales tax to candy and soda, Shor said the proposal does not change what is subject to the sales tax, except for software solutions and computer services that will be taxed as a good, instead of a service.
The governor’s proposal calls for 45 personal tax exemptions to be eliminated, including the deduction for Social Security and railroad retirement contributions and the tuition tax deduction.
Asked how eliminating the tuition tax break fit with the governor’s vision for expanded college tuition grants programs and making higher education more affordable, Sullivan said, “You can’t look at each of these in isolation. They are being replaced by an all-purpose doubling of the personal exemption that will benefit all taxpayers.”
The personal tax exemption would be doubled under Patrick’s plan from $4,400 to $8,800 for most individual filers, and to $17,600 for couples.
On the business side, the corporate excise tax would remain at 8 percent, but the administration is proposing to eliminate special classifications for security and utility corporations that Sullivan said are “no longer relevant in the modern world” and used only as tax shelters.
Sullivan also said the governor will propose eliminating the FAS 109 deduction, a component of a 2008 corporate tax reform law giving certain large multi-state corporations a deduction to help absorb the additional costs incurred by a new combined reporting tax law requirement.
The deduction has been postponed by the Legislature since its passage, never taking effect, and Sullivan said there has never been a solid justification for its existence.
Finally, the plan would also make a change to the sales factor used to calculate taxable profit for companies that do business in multiple states. The change would tax profits on goods and services based on where they are delivered instead of where they are produced, benefiting home-state companies over out-of-state businesses that operate in Massachusetts.