Governor Patrick has come out with a series of proposed tax increases. These increases will cover a wide spectrum of the Massachusetts tax base. There are some offsets, mostly the reduction on the state sales tax to 4.5% and an increase to the . However, the overall effect would increase the overall tax burden of residence and businesses of the Commonwealth by about $2 billion. Here are the tax increase proposals that will impact most tax payers in the Commonwealth.
Individual Tax Increases:
Individual income tax rate – The Governor proposed a 19% increase in the Massachusetts individual income tax rate from 5.25% to 6.25%.
Cigarette excise tax - Increase the state tax on cigarettes from $2.51 to $3.51 per pack, a 40% increase. This would raise $166 million per year. The increase also applies to smokeless tobacco products. Sales tax will continue to be assessed on the excise tax.
Expand sales tax – This one has been on the Governor’s agenda for a couple of years. He is proposing to expand the sales tax to apply to candy and soda. According to estimates, this would raise $53 million of additional sales tax.
Expand bottle redemption to bottled water and sports drinks – This is a tax although the Governor might not call it one. Since many residents discard their bottles without receiving their deposit back, it is effectively a tax. Yes, one can choose to return the bottles and cans, but only if they have nothing better to do on a Saturday afternoon, plus what is the cost of the gasoline to get to and from the bottle redemption center. In my hometown and most towns throughout the Commonwealth, there is curbside recycling. Most water bottles are recycled in this manner.
Raise gasoline tax – This adds a half cent to the gas tax and increases it annually by inflation. The crafty thing about this is that it allows the tax on gasoline to increase in perpetuity without any further votes by legislators. There is a reason this tax has not been raised for 20 something years, it is generally unpopular and legislators do not want to vote on it.
Raise tolls – This proposal would raise turnpike tunnel and bridge tolls by 5% every two years. See above on automatic increases without legislative votes needed. In addition, the Governor has requested tolls be reinstated on the Western part of the Turnpike.
Increase registry fees by 10% every five years. See above regarding automatic tax increases .
Elimination of Tax Deductions: There are 45 deductions or exemptions proposed for elimination by the Governor, each is effectively a tax increase. Here are the ones that will impact the most Massachusetts taxpayers. (Note – in cases where I have suggested the potential tax increase, it is assuming the higher proposed income tax rate of 6.25%. There would also be some potential offset to this by increasing the standard deduction, which has also been proposed.)
Repeal of exemption on capital gains on home sales – This one can really hit some people hard. Currently, Massachusetts conforms with the federal tax law in exempting up to $500,000 in capital gains on the sale of one’s primary residence. Governor Patrick has proposed eliminating this exemption. If you have been in a home for say 30 years or more, and your home has increased substantially in value, you could effectively see a new $30K tax liability on your home ($500K multiplied by the new proposed tax rate of 6.25%).
Social security and public pension deduction - Currently each taxpayer is allowed a deduction of up to $2,000 for payments made to Social Security or to a public pension plan. This has been proposed for elimination. For a dual income household, this would increase their Massachusetts income taxes by up to $250. Does any think it is unfair that the state is taxing monies that are being impounded by the federal government as Social Security taxes?
Dependents under age 12 – The current law allows for a deduction of $3,600 for each dependent in a household under the age of 12, to a maximum of two dependents, or $7,200. The Governor has proposed to eliminate this deduction. This will impact about 500,000 tax filers. A family with two qualifying dependents will pay up to $450 of additional taxes to the state.
Childcare expense deduction – Currently taxpayers are allowed a deduction of up to a maximum of $9,600 for employment related child care expenses, i.e. day care expenses. This is proposed for elimination. Additional Massachusetts income tax on families with two or more children in daycare would be up to $600.
Personal exemption – The parents of full time students 19 years and older currently receive a $1,000 deduction so long as that student is considered a dependent. The Governor has proposed elimination of this deduction. The increased state income tax per family would be $62.50 for each qualifying dependent.
Tuition deduction – Currently taxpayers can deduct tuition payments made toward a two or four year degree, to the extent those payments exceed 25% of adjusted gross income. This is proposed for elimination and will impact an estimated 255,000 taxpayers.
Employer education programs – Certain employers reimburse employees for undergraduate and graduate education tuition. Massachusetts currently allows up to $5,250 of this on a tax free basis to the recipient. The Governor has proposed eliminating this exemption such that all tuition reimbursements will be taxable to the employee. The Governor often talks about investing in education, but wants to tax tuition reimbursement made to employees looking to invest in themselves.
MBTA Passes – Currently employers can provide MBTA passes to employees and pay for parking and certain other commuting expenses without this being reported as income to their employees. The Governor has proposed that these benefits will be reported as income to the employees.
Group life insurance – Certain employers in Massachusetts provide group life insurance benefits to their employees. Under current law, the value of this benefit is not taxed to the recipient. The Governor has proposed that these benefits be taxable income to the employee. My suspicion is that some employers might start eliminating group insurance benefits, commuting reimbursements and employer education programs. This suspicion is not so much for the taxability issue, but because they will have the additional administrative burden of reporting these benefits on an employees’ W-2.
Health Savings Accounts - Currently individuals can deduct payments of $3,100, $6,250 for families, on payments made to a health savings account. The Governor has proposed eliminating this tax deduction. This would could cost a family up to $391 in additional state taxes.
Commuter deduction – The state currently allows a deduction up to $750 for Mass Turnpike tolls or MBTA monthly passes. This has been proposed for elimination and could cost some up to $47 in additional taxes. So someone on the Mass Turnpike corridor that commutes to Boston pays a significant amount in tolls, which is effectively a tax for which no deduction will be allowed.
Corporate tax increases:
There are various tax increases proposed on corporations. All are a bit complicated, but will raise about $500 million in additional tax revenue. One of the proposals expands the sales tax to customized computer software. This will generate some $265 million of additional tax revenue. Also, the Governor proposed repealing the FAS 109 deduction, which would bring in $76 million per year. There is also a proposal to change the apportionment rule relating to services, which would raise $35 million. Finally, a limit on the film credit will raise an estimated $40 million.
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