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Massachusetts Implements Reduction in Personal Income Tax Rates

2 min readBy: I. Harry David

Massachusetts taxpayers will face a slightly smaller tax bill in 2012, thanks to a reduction of their flat income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 5.3 percent to 5.25 percent, as special conditions were met for an automatic adjustment in tax rates. A referendum in 2000 mandated a gradual reduction from 5.95 percent to 5 percent by fiscal year 2003, but lawmakers revised the mandate in a statute in 2002, freezing the rate at 5.3 percent until the state’s tax revenues (adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. ) grew for four quarters in a row.

Massachusetts taxpayers have the nation’s 11th highest tax burden and score 15th highest in our individual income tax index. Massachusetts taxpayers worked until April 14 this year to pay their total tax bill, ranking the state tenth nationally. While the rate reduction may seem paltry, it is a step in the right direction toward giving Massachusetts a more competitive tax code.

Massachusetts has experienced numerous changes to its income tax rate in the last two decades, forcing taxpayers to plan under a cloud of uncertainty. From TaxAnalysts (subscription required):

  • “in 1989 the legislature increased the 5 percent rate to 5.75 percent in what was described at the time as a temporary increase;
  • in 1990 the rate was raised to 6.25 percent;
  • in 1992 the rate dropped to 5.95 percent;
  • in January 2000 the rate was cut again, to 5.85 percent; and
  • in November 2000, voters approved a ballot measure to cut the rate to 5.6 percent for tax year 2001, 5.3 percent for tax year 2002, and 5 percent for tax year 2003 and after.”

But, to give credit where it is due, Massachusetts tax policy has the merit of taxing income at a flat rate, rather than at progressive rates. This fact may go some way toward explaining why tax revenues have grown lately, despite troubling situations in other states. Many studies find that a state’s budget gap is likely to be smaller under a less progressive rate schedule, because a progressive rate schedule tends to make the tax revenue stream more volatile.

More on Massachusetts here.