Overview:
A proposed ballot question to cut the state income tax rate from 5% to 4% over three years could lead to the elimination of a charitable giving tax deduction and a higher tax rate on some small businesses, according to the Healey administration. The charitable deduction, established with 72% voter support in 2000, would become unavailable to taxpayers beginning in 2028, costing taxpayers around $480 million by 2031. The income tax cut ballot question would also impact businesses organized as S corporations with total receipts of $9 million or more, increasing their effective tax rate from the current 3% to 4%.
BOSTON – There has been lots of talk about the impacts that a prospective ballot question to cut the state income tax rate could have, but the Healey administration has identified two new consequences should the question pass: elimination of a charitable giving tax deduction and a higher tax rate on some small businesses.
Supporters of the proposal to cut the income tax rate from 5% to 4% over three years say the measure is needed to sharpen the state’s competitive edge and provide relief to overburdened household budgets. Opponents, including Beacon Hill Democrats, argue the question’s passage would upend the state budget to the detriment of social services and municipal budgets across Massachusetts.
On Friday, the Executive Office for Administration and Finance said that it discovered the two new effects the tax policy question could have as it prepared a required fiscal impact statement. Gov. Maura Healey’s budget office said the knock-on effects would result because of the intertwined framework of the Massachusetts tax code, with a change in one line potentially leading to other, indirectly-related changes elsewhere. The administration’s analysis was first reported by the Boston Globe.
That’s the case for the tax deduction for charitable giving, established with 72% voter support at the statewide ballot in 2000. The Democrat-controlled Legislature delayed its implementation under a 2002 law that raised taxes by more than $1 billion. That 2002 law included a trigger that would allow the charitable deduction to be activated automatically when the state income tax rate fell to 5%. That happened in 2020, though lawmakers further delayed implementation of the charitable deduction until 2023.
The 2002 law remains on the books and declares that “no such deduction shall be allowed in any taxable year unless the rate of tax on Part B taxable income in section 4 in the prior taxable year was equal to 5 per cent.”
The income tax cut ballot question would lower the Part B taxable income tax rate from 5% starting Jan. 1, 2027. As a result, Healey’s budget office said, the charitable deduction would become unavailable to taxpayers beginning Jan. 1, 2028. That would cost taxpayers (but benefit state tax revenues) to the tune of about $480 million by the time the tax cut is fully phased in by fiscal year 2031.
“The proposed income tax cut will provide immediate relief to every taxpayer in Massachusetts while strengthening our economic competitiveness and supporting job creation. This ballot question puts an average of $1,300 back into the pockets of Massachusetts families—real money that can help offset the rising cost of living,” Chris Keohan, spokesman for the Taxpayers for an Affordable MA ballot committee, said Friday. “That is our focus. We will not be distracted by attempts to shift attention away from the simple fact that this proposal delivers broad-based tax relief to the people of Massachusetts.”
A&F said the income tax cut ballot question would also impact businesses organized as S corporations that have total receipts of $9 million or more. Those businesses pay a tax rate equal to the difference between the Part B taxable income tax rate (5%) and the tax rate on corporations (8%).
So if the ballot questions lowers the Part B rate to 4%, the effective rate paid by those S corporations would gradually rise from the current 3% to 4%. Smaller S corporations would also see an increase, though smaller, because their effective tax rate is based on the rate used by larger S corporations, A&F said.
Top lawmakers have repeatedly expressed their distaste for the tax cut ballot question and say they are open to talking with proponents about possible alternatives to keep the question off November’s ballot.
On Monday, the Supreme Judicial Court heard arguments in an attempt to have the question disqualified based on an alleged error in the attorney general’s summary of the initiative.
The lawsuit claims the summary fails to make clear that the tax reduction would apply to long-term capital gains income. Attorney General Andrea Campbell’s office argues that it accurately summarized the proposal and that effects on long-term capital gains income taxation are – similar to the two impacts identified Friday by the Healey administration – a result of existing state law rather than the ballot question directly.
“The summary is intended to be a neutral description of what the measure proposes to do, and not all the ancillary effects that the proponents may or may not have intended the measure to have,” the attorney general’s office wrote in a court filing last month.