Massachusetts residents will see their state income tax rate drop slightly for the second-straight — but final — time next year.
Gov. Charlie Baker’s administration announced Friday that the state hit a number of revenue metrics, legally triggering a reduction of its Part B individual income tax rate from 5.05 percent to a flat 5 percent.
The new rate takes effect Jan. 1. It also marks the finale of a long-running process to lower the state income tax to a rate demanded by Bay Staters back at the beginning of the century.
In 2000, Massachusetts voters approved a ballot measure, Question 4, to reduce the state’s then-5.85 percent income tax rate to 5 percent over the course of three years.
Nope. Those cuts apparently were too steep and, combined with slower economic growth at the time, resulted in state revenue shortfalls with cascading effects.
In early 2002, The Boston Globe reported that then-acting Gov. Jane Swift had been forced to cut state aid to many suburban communities. And those cuts — in communities that had overwhelmingly supported Question 4 — sent officials scrambling to either hike property taxes or cut local services to make up for the lost revenue. Schools, fire stations, and police patrols alike were all put under the chopping block.
Later that year, state lawmakers stepped in, passing a law freezing the rate at 5.3 percent and enacting new safeguards to make the road to 5 percent a little less rocky.
The 2002 law allowed the state to lower its tax rate at a lesser rate, 0.05 percent, each year, but only if five specific revenue growth metrics were met. Lawmakers also suspended another voter-approved 2000 ballot measure allowing residents to claim charitable deductions on their state tax returns.
Massachusetts didn’t see another income tax reduction for a decade. But in 2012, the state hit all five revenue measures, and the rate dropped 0.05 percent to 5.25 percent. It happened again in 2014, 2015, and 2016 — and another time last year, bringing the rate to 5.05 percent. And late Friday morning, state officials announced that the Department of Revenue had certified that the five tests had been met once again — and for the last time.
“We are pleased that the necessary revenue benchmarks have been met and the income tax rate is being fully reduced to 5%,” Lt. Gov. Karyn Polito said in a statement, celebrating the occasion. “This tax cut reflects steady economic growth and will provide a well-deserved break to Massachusetts workers.”
Gov. Charlie Baker noted that the state was “finally making happen what voters called for almost 20 years ago.” The 5 percent rate is the lowest the state’s income tax has been since 1985.
Officials estimate that the final adjustment will save Massachusetts taxpayers $88 million in the current fiscal year and approximately $185 million in fiscal year 2021 beginning next October. Part B income excludes income from things like stocks and capital gains.
At the individual level, that 0.05 percent change means an extra $20 for a single renter making $50,000 a year. For a married homeowner with a $125,000 salary and a family a four, it means $50. For those making in the high six-figures, it adds up to several hundred dollars in savings.
Hitting the 5 percent mark also triggers the return of the state charitable deduction that lawmakers had nullified, effective Jan. 1, 2021. Compared to the 0.05 percent income tax rate change, officials estimate the deduction will have an even more significant impact, to the tune of $300 million a year.
The Baker administration says they had already incorporated the reduction into their future assumptions, meaning there is no change in their revenue outlook — barring another ballot question, of course.