BOSTON — Gov. Deval Patrick’s planned shifting of the income and sales tax rates would essentially result in a revenue “wash” and the bulk of $1.9 billion in new revenues under his tax code overhaul would come from eliminating specific exemptions and deductions, according to the Massachusetts Taxpayers Foundation.
“These deductions and exemptions can have a huge impact on individual taxpayers,” MTF President Michael Widmer told the News Service.
The 44 personal income tax exemptions and deductions targeted by Patrick add up to $1.08 billion in new revenue under the tax plan, or 68 percent of the money Patrick hopes to raise once the sales tax cut and income tax increase essentially cancel each other out, according to the business-backed organization.
The net revenue gain from increasing the income tax, decreasing the sales tax, and doubling personal exemptions is $110 million, or about 6 percent of the proposed new revenues.
Widmer said the debate over Patrick’s tax proposals should focus on the proposed tax code reforms as well as the proposed revenue increase.
Patrick told the News Service that a commission studying the tax expenditure budget — a listing of foregone tax revenue due to myriad tax policy directives — last year found more tax breaks being given out than revenue collected each year by the state.
“To some extent, it’s not a question of what people pay in taxes exclusively, it’s also who pays and some of them are out of date and a few of them we put on the table,” Patrick said.
Patrick said the objective of his plan is to focus on what the state wants to prioritize for investments and why.
“And having a 21st Century transportation system, an education system that doesn’t leave people out and leave talent on the sidelines is what this is about. It’s how we grow jobs and grow opportunities. There’s more than one way to accomplish that. I put my ideas forward. Let’s see what the Legislature comes back with and we will engage with them and the [MTF] and everybody else,” Patrick said.
Glen Shor, the governor’s secretary of administration and finance, did not take issue with Widmer’s math, but said he looks at the proposal through a different prism. “The governor’s revenue proposals should be taken as a whole. It raises $1.9 billion by creating a fairer and simpler tax system. Half of Massachusetts households will pay the same or less than what they do today.”
Shor said the income tax hike is the principle source of new revenue, with the brunt of the increase falling on the mid- to-higher income earners, while lower income individuals and families will benefit from a reduction in the sales tax and a doubling of the personal tax exemption, thus reducing their taxable income. He said individuals will save $900 million by dropping the sales tax to 4.5 percent, not accounting for what he called “public health measures” such as increasing the cigarette tax by $1 per pack and adding sales tax to candy and soda. Those changes would net $219 million in new revenue, he said.
The biggest revenue-raising deduction elimination also affects the most people. Currently, Massachusetts residents can deduct up to $2,000 in federal payroll taxes and public pension plans from their personal income for state taxes. That deduction affects 3.6 million filers and its elimination will generate $357 million in revenue, under the higher, proposed income tax rate.
Without the offset of the concurrent reduction in the sales tax rate, from 6.25 percent to 4.5 percent, the increase in the income tax, from 5.25 percent to 6.25 percent would be able to raise revenues by $1.48 billion. The sales tax reduction would decrease state revenues by $1.37 billion.
Another portion of the revenue increases would come from increases in corporate taxes, including a $40 million annual limitation on film tax credits. In total, the Massachusetts Taxpayers Association said those corporate tax changes would raise $499 million, or 26 percent of the total new revenue.
Shor, however, said the business group’s calculation does not take into account how businesses will save $470 million in sales taxes from the governor’s proposal. “If you were to count winners and losers, there would be many more business winners than losers.” Shor said.
Looking at the proposal as Shor does, corporate taxpayers would only see an increase of $29 million in taxes.
In rolling out his tax proposal at the State of the Commonwealth address, Patrick said it was important to maintain a fair and competitive tax structure that could also raise needed funds for transportation and education.
“Right now, our overall tax rates are comparable to our neighbor states and the states with which we compete,” Patrick said. “We need to sustain that balance, and also assure a sharing of the load within the Commonwealth that is fair. “
Patrick’s multi-faceted approach to overhauling the tax code generally meshes with calls for broad tax law reforms called for in recent years by Rep. Jay Kaufman (D-Lexington), who chaired the Committee on Revenue last session. House Speaker Robert DeLeo has yet to announce this session’s Revenue chair.
The state’s tax expenditure budget identifies hundreds of specific tax breaks, which the Tax Expenditure Commission, chaired by former Administration and Finance Secretary Jay Gonzalez, recommended reducing in a report issued last April 30.
“A reduction in size of the Tax Expenditure Budget provides the opportunity to reduce tax rates paid by everyone,” the commission wrote, “or to generate more revenue to support government programs and services.”