Tax cuts of the ‘90s
Often we hear how the Legislature "passed 42
tax cuts" during the ‘90s. Many of those tax cuts were adopted in an
effort to limit the size of mounting surpluses that, even with the tax
cuts, were running a billion dollars a year – during the same period
that CLT was trying to get the historic 5% income tax rate finally
restored.
Over the years there have been various lists that depend
on how "tax cut" is defined to arrive at their totals. Some have even counted the
initiative petitions passed – not by the Legislature – but despite
the Legislature, by the voters.
Of course this was before "The Biggest Tax Increase in State History"
in 2002, which restored some of the taxes that had been cut – yet still
are counted among the list.
We have listed below the various legislative tax cuts
since 1990, including those in this 21st century, and have divided them
into the personal income tax, the sales tax, business taxes, and
"other." At the end we list ballot tax cuts that were enacted by
the voters or were passed by legislators only after sufficient
signatures were collected for a ballot question, so that legislators could
take credit for the inevitable.
STATE PERSONAL INCOME TAX
1. Income tax rate cut from 6.25 to 5.95%
As you know, the income tax rate was increased
"temporarily" in 1989 from its traditional 5%. That year the
rate became 5.75%. Because both Republicans and Democrats were angry with
Michael Dukakis – whose administration had hidden the deficits during
his presidential campaign – the vote was very close and could not have
passed unless legislators could say it was "temporary." And sure
enough it was, because the next year they hiked the rate again, this time
to 6.25%. But this time, part of it was actually "sunsetted;"
the legislation required that the 6.25% rate drop to 5.95% in 1992.
When that time came, the legislative leadership wanted
to keep it at 6.25%, but Governor Weld, who had signed the "No New
Taxes" pledge, threatened a veto. That meant a roll call vote to
override his veto and keep the 6.25% was required, so the leadership
didn’t even try. So the drop to 5.95% happened automatically, but
they count it as a tax cut.
2. "Unearned income" (i.e. savings and
investment income) tax cut for senior citizens only
Passed by the Legislature, but it would probably
have been found by the courts to be unconstitutional, if an initiative
petition hadn’t subsequently given it to everyone.
3. Cut "earned" and "unearned"
income tax rate from 5.95% to 5.75%
Phased in over 3 tax years: 2000 = 5.85%, 2001 =
5.80%, 2002 = 5.75%. This was done to head off our petition drive, but it
was made clear that the rate would not drop any further; so we pursued the
ballot campaign for the 5% rate.
4. Long-term capital gains tax rate cut
This was intended to provide incentive for
investing long-term by reducing the tax rate each year the investment is
held, from 12% to zero after six years. This was later repealed
during "The Biggest Tax Increase in State History." The rate now
stops at the "earned and unearned income" tax rate."
5. Allow short- and long-term capital loss offsets
against capital gains and interest/dividend income
6. $250,000/$500,000 capital gains exclusion for sale of
principal residence
Updates our Massachusetts tax law to conform to
the federal tax code.
7. Creates a new head of household income tax filing
status
Raised personal exemption for single parents
from $2,200 to $3,400.
8. Double personal exemption
73% increase for tax year 1998, 100% increase
starting in tax year 1999. This was long overdue; the federal government,
as part of the Reagan tax cuts, indexed the personal exemption to
inflation but Massachusetts has not. However, even this adjustment was
subsequently repealed in 2002 as part of "The Biggest Tax
Increase in State History."
9. Raise no-tax-status threshold for low-income families
with children
Married couples with children may earn up to
$12,000 plus $1,000 per child tax-free. Heads of households may earn up to
$11,000 + $1,000 per child tax-free.
10. Increase "Under 12" dependent
deduction
11. Increase "Under 12" dependent
deduction again, extend it to elderly and disabled dependents
12. Increase child/dependent Care Expense Deduction
13. Deduction on student loans
Unfair to students who pay cash for their education. An Education IRA
would be better.
14. Increase Higher Education Student Loan
Deduction
Removes some restrictions on loan deductibility which exist in
the federal income tax code adopted by Massachusetts as of 1/1/98.
15. Exempt military retirement pay from income
tax
16. Earned Income Tax Credit
Taxpayers -- many of whom don’t pay state income taxes whatsoever –
who claim the federal earned income tax credit can claim a refundable credit
on their Massachusetts tax returns equal to 10% of the amount claimed on
the federal return.
17. Increase Earned Income Tax Credit (from 10%
to 15% of federal credit claimed)
18. Title V tax credit provides homeowners a credit
for sewer system relief
The least the state can do, after ignoring the harbor pollution
problem for decades, the Dukakis administration bungling an opportunity
and missing out on the federal matching funds deadline, than charging it
all to current homeowners.
19. Refundable State Tax Credit Against Property
Taxes for Seniors ("Circuit Breaker")
Seniors are eligible for a tax credit to the extent that their
property taxes or 25% of their rent exceeds 10% of their income. Filer's
income must not exceed $40k/$50k/$60k (single/head of household/joint
filer), and value of property must not exceed $400,000. Maximum credit is
$375 for tax year 2001, $750 for tax year 2002 and thereafter. Starting
with tax year 2001, all thresholds and credit amounts are adjusted for
inflation over 1999 base.
20. Eliminate 3% Adjusted Gross Income Floor on
Adoption Expense Deduction
Before this change, only adoption expenses in excess of 3% of a
filer's adjusted gross income could be taken as a deduction.
SALES TAX
21. Sales tax on services repeal
This also passed in a hurry in 1990 as a tax on legal services,
accountants, services for "the rich." When legislators realized
it applied to hundreds of services including lawn mowing and snow plowing,
they went along with Gov. Weld and repealed it just as it took effect in
early 1991.
22. Repeal of the telecommunications sales tax
23. Sales Tax Exemption for Trigger Locks and
Gun Safes
24. Exempt Prepress Equipment from Sales Tax
25. Exempt Aircraft and Parts from Sales Tax
25. Exempt Aircraft and Parts from Sales Tax
26. State sales tax holiday on August 14, 2004.
BUSINESS TAXES
27. New corporate research tax credit
28. Increase corporate investment tax credit (ITC)
from 1% to 3%
This is regularly extended, though legislators will not vote to make
it permanent.
29. Allow investment tax credit for leased equipment
previously excluded from the ITC
30. Bank tax reform
Reduced rate from 12.54% to 10.5% over 5 years.
31. Single sales factor apportionment formula
Phased-in over 5 years for manufacturers, effective 1/1/96 for defense
contractors. Modified research credit for defense manufacturers.
Often referred to as "the Raytheon tax cut."
32. Harbor maintenance tax credit
Credit against corporate excise for federal harbor maintenance taxes
paid by shippers of goods through Massachusetts ports.
33. Allow income exclusion for contributions to
"403b" annuity plans
Pension plans for
nonprofit/public school employees.
34. Exempt earnings and distributions for Roth
and Education IRAs
Updates Massachusetts tax laws to conform to federal code on Roth and
education IRAs.
35. Elimination of the net investment income tax on
domestic insurance companies
This was done to keep more of them from leaving the state.
36. Job-training tax credit
37. Apportionment reform for mutual fund
companies
For the purpose of calculating the corporate excise, mutual fund
service providers will source sales to the state of their customers
effective 1/1/97. Single sales factor apportionment effective 7/1/97.
Often called "the Fidelity tax cut." As we understand it, this
changed a tax policy that was unfair. And it was clear that this type of
business can easily relocate anywhere.
38. Insurance company tax cuts
Contingent upon $100 million in contributions to each of two
newly-created community development funds over a 5 year period.
39. Repeal of Pay-to-Play
More reform than tax cut, this says taxpayers don’t have to pay an
amount in dispute prior to appealing assessments.
40. Low income housing tax credit
Provides 5-year tax credits to developers who
set aside a specified percentage of housing units for low-moderate income
renters.
41. Unemployment tax rate reduction.
It is important to note that most of these tax cuts
took place during the period that CLT was advocating for the income tax
rollback. Many of the tax cuts were substituted for the permanent,
politically hard-to-reverse cut in the personal income tax rate which
the legislative leadership did not want. The major business tax cuts
were often adopted in fear of businesses taking their jobs elsewhere.
OTHER
42. Estate tax reform
From 1993-1996, the Legislature raised the estate tax exemption by
$100,000 per year from $200,000 to $600,000 – the same as the federal
exemption. Beginning in 1997, only estates with a value of $600,000 or
more are required to pay Massachusetts estate taxes, and the amount of
state tax is equal to the allowable credit against federal estate taxes
("sponge tax"), resulting in no additional state tax liability
above and beyond what would be paid in federal estate taxes. This tax
has increased with the federal changes and needs to be revisited.
INITIATIVE PETITION TAX CUTS
1. Increase
rental deduction from $2,500 to $3,000
This increase was passed by the Legislature, but the original rental
deduction was created as part of Proposition 2˝ in 1980. The Legislature
had subsequently put a cap on it, which this legislation raised to reflect
rental appreciation.
2. Rate on
"unearned income" – interest and dividend
Phased down so that investment income rate –
once 12% – is reduced to whatever the earned income rate is (presently
5.3%). This was adopted in response to an initiative petition on its way
to the ballot.
3. Charitable
deduction
This was an initiative petition on its way to
the ballot when legislators saw the writing on the wall, enacted it and
took credit. Then the Legislature repealed it during the latest fiscal crisis.
Another point to make an incumbent debate.
4. Tax
reduction fund
This was created as part of a CLT/Mass. High Tech Council (MHTC)
ballot campaign in 1986, and has kicked in or been adjusted in the tax
years below. It has been neutralized in the past few years and will be
destroyed if the Finneran constitutional amendment for a mandated "rainy
day fund" is passed by the voters.
a) Tax
reduction fund, Phase I: Increased
the personal exemptions for tax year 1996 resulting from FY96 budget
surplus. $150 million tax revenue reduction occurred in FY97.
b) Tax
reduction fund, Phase II: Increased
the personal income tax exemption for tax year 1997 to expend the
remainder of FY96 transfer to Tax Reduction Fund. $92 million tax
revenue reduction occurred in FY98.
c) Tax
reduction fund, Phase III: Transferred
$200 million to Tax Reduction Fund and raised tax year 1998 personal
exemptions by enough to cut taxes by $200 million + interest and any
other balance in the Tax Reduction Fund (approximately $9 million) for a
total tax cut of $209 million. Resulted in a tax cut of approximately
$57 for single, $115 for joint, and $89 for head of household filers.
$209 million tax revenue reduction occurred in FY1999.
5. Income
tax rollback/CLT/MHTC/Cellucci ballot question in 2002
Reduced income tax rate on "earned"
income and "unearned" (savings and investment) income to 5.6% in
tax year 2001, 5.3% in 2002, and 5.0% in 2003. The voters’ 59% mandate
was "frozen" by the Legislature at 5.3% in 2002.
According to Romney administration analysis, the
Legislature’s formula that slowly restores some of the tax cuts that
were repealed or "frozen" in 2002, would finally
"defrost" the "temporary" income tax rate rollback in
2014. With state spending increasing again, CLT calculates that by 2014
the Commonwealth will experience yet another cyclical fiscal crisis
that will demand another tax increase instead.
We recently received a list from the House Taxation Committee that contained 62 tax cuts! Most that we missed above are business items: two brownfield credit bills, two investment tax credits bills, the exempting of snacks in vending machines from the sales tax, a subchapter S federal rules change, some housing credits, direct pay certificates, and a banking partnership bill. There is also an exemption for recovered assets of holocaust survivors and a break for surviving military spouses. But we don’t count the law that lets elderly homeowners work off part of their property tax bill, or the gas tax freeze. And the Taxation Committee counts initiative petition-generated tax cuts in its 62; we count them as ours, not the Legislature’s.