In 2009, Massachusetts revised its sales tax laws. Among the more important changes, the general sales tax rate was raised from 5 percent to 6.25 percent and alcoholic beverages were made newly subject to the general sales tax (separate from the longstanding selective sales tax already applied to alcoholic beverages). These 2009 sales tax law changes will increase revenues in FY 2011 by approximately $1 billion.
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The amount of state and local taxes paid in Massachusetts as a share of state personal income remained well below the U.S. average in Fiscal Year 2008, according to the U.S. Census Bureau's newly updated survey of State and Local Government Finances.
In economic development legislation under consideration in the House, there are proposals for new corporate tax breaks. This Facts At a Glance provides information about the provisions. (Updated July 13, 2010)
National studies have examined both the level of business taxation in Massachusetts and the “tax climate.” These studies have consistently found that the overall level of business taxation is significantly lower in Massachusetts than in most states. An update of one prominent study, produced regularly by the Council on State Taxation (COST), ranks Massachusetts 43rd for its overall business tax climate in Fiscal Year 2009, making Massachusetts among the lowest taxed of all states by this measure.
The Commonwealth employs a variety of means to achieve the goals of ‘economic development’ — to promote job creation, attract and retain businesses, and foster economic growth in the state. These include long-term strategies to increase the productivity of our workforce and our economy by investing in education and in infrastructure as well as short-term strategies to try to attract and subsidize specific businesses and industries.
Though states use a combination of these approaches within their economic development programs, most — including Massachusetts — spend a significant share of their economic development resources on economic development tax expenditures. These tax exemptions, deductions, credits, deferrals and the creation of special tax rules are employed by state governments in an effort to attract new businesses to the state and prevent those are already in the state from leaving.
In 2008 the Legislature enacted legislation designed to reduce corporate tax avoidance, primarily by adopting a system known as “combined reporting” that makes it more difficult for companies to reduce their state tax liability by shifting income between subsidiaries. The legislation also contained a phased-in reduction of the tax rates for corporations and financial institutions. The state Department of Revenue estimates that this legislation will be responsible for the state collecting $307 million more in tax revenue in Fiscal 2010 than would have been collected under prior law, which reflects an incremental revenue impact of $80.3 million from Fiscal 2009.
In 2008 Massachusetts adopted significant reforms of its tax laws to reduce corporate tax avoidance while also reducing the overall corporate tax rate. During the debate on this legislation, a number of proposals were put forth that created new tax breaks or weakened the state’s ability to enforce the tax laws effectively. Many of these proposals were ultimately rejected. One proposal that was included in the law related to the interaction of Federal Accounting Standard 109 and the tax reforms being implemented.
The amount of state and local taxes paid in Massachusetts as a share of state personal income fell from 10.6 percent in Fiscal Year 2006 to 10.5 percent in FY 2007, according to the U.S. Census Bureau's annual survey of State and Local Government Finances.
A property tax “circuit breaker” provides income tax reductions for people whose property taxes comprise a disproportionately large share of their income. There is a great deal of policy flexibility with circuit breakers in terms of cost as well as the populations effected.
Massachusetts has a fuel tax of 23.5 cents. The tax was last raised in 1991. As of FY 2006, Massachusetts ranked 47th in the nation in terms of percent of personal income devoted to the gas tax.
Determining who is affected most by the state’s tax system, as well as individual taxes, is important in considering the fairness of tax policy changes. While most taxes in Massachusetts have a fixed rate – for example, the state has a flat 5.3 percent income tax – different income groups are affected differently by each tax. These differences can be explained in terms of regressivity and progressivity – how taxes vary by income level.
Massachusetts has an income tax rate of 5.3 percent. The income tax is the single-largest source of revenue for the state, totaling $11.4 billion in fiscal year (FY) 2009. Forty-three states have an income tax, with rates as high as 9.5 percent. Of the states with an income tax, Massachusetts is one of only seven states which does not have a higher income tax rate for higher income earners.
Massachusetts has a general sales tax of 5 percent, with exemptions for food and clothing purchases under $175. The sales tax is the second-largest source of tax revenue for the state, and is projected to generate just over $4 billion in the coming fiscal year. Of the 45 states that have a general sales tax, Massachusetts ranks last in terms of the revenue the sales tax raises as a percentage of personal income.
Aside from the property tax and motor vehicle excise tax, Massachusetts municipalities have very limited ability to adopt local taxes. This leaves cities and towns in a difficult position because of their dependence on local aid, which is now being cut and because of limitations placed on the property tax by Proposition 2 ½.
While the immediate cause of Massachusetts’ fiscal crisis is the national recession, policy choices made over the past decade created a structural deficit that have reduced the state’s ability to address the economic downturn.
Ten years ago Massachusetts enjoyed substantial annual budget surpluses. As the Fiscal Year 2010 (FY 2010) budget process begins, the Commonwealth faces a deficit that may exceed $3 billion. What happened over this decade that took us from fiscal strength to a severe fiscal crisis?
Clearly, there are both short-term and long-term causes of our fiscal crisis.
This fact sheet summarizes the tax changes in the decade between 1998 and 2008 that erased large budget surpluses and left the state fiscally unstable.
This primer on taxes in Massachusetts provides an overview of the Commonwealth's tax system as well as clear information and analysis of how Massachusetts compares to other states and how our state's tax system has changed over time. The report reviews standard criteria for examining a tax system -- fairness, simplicity, efficiency, adequacy, and stability -- and, in light of those criteria, examines each of the major taxes in Massachusetts' overall tax system. It also describes changes that have occurred in recent years and the fiscal implications of changes to each of the Commonwealth's major taxes.
On July 1st, 2008 the Massachusetts Legislature enacted corporate tax reform legislation that will significantly reduce opportunities for corporate tax avoidance, improving the fairness and efficiency of the state tax system.
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