Baker-Polito
Administration Announces Massachusetts Income Tax Rate Dropping to 5% on
January 1, 2020
Statutory income tax
lowering process now completed
BOSTON — The Baker-Polito
Administration today announced that the state’s Part B individual income tax
rate will be reduced from 5.05% to 5% effective January 1, 2020. This upcoming
tax cut represents the conclusion of the statutory process laid out in a 2002
state law to lower the income tax rate to 5% based on certain state revenue
milestones, and will return $88 million in Fiscal Year 2020 and approximately
$185 million in Fiscal Year 2021 to taxpayers.
“Starting in
January, the income tax rate will be the lowest it has been in decades,
allowing Massachusetts taxpayers to be able to keep more of their hard-earned
money,” said Governor Charlie Baker. “Our Administration is working to
keep the Commonwealth’s economy strong while maintaining fiscal discipline and
now we are finally making happen what voters called for almost 20 years ago.”
“We are pleased
that the necessary revenue benchmarks have been met and the income tax rate is
being fully reduced to 5%,” said
Lieutenant Governor Karyn Polito. “This tax cut reflects steady
economic growth and will provide a well-deserved break to Massachusetts
workers.”
The
2002 law provides that for each tax year in which certain inflation-adjusted
baseline revenue growth requirements are met, the income tax rate will be
reduced by increments of 0.05 percentage points until the rate reaches 5%. The
legislation replaced a tax rate reduction schedule that had passed by ballot
initiative in November 2000.
“Consistent increases
in state revenue are triggering this final income tax rate reduction,” said Administration and Finance
Secretary Michael J. Heffernan. “This is excellent news for
Massachusetts taxpayers, and it was incorporated into our assumptions for FY21
so there is no change in our revenue outlook.”
Part B income
includes wages, salary, and many other forms of income, including
self-employment income; business, professional and farm income; S corporation
distributions; and rental income from personal property. The rate associated
with Part B income is also applied to several other income categories,
including interest and dividends and most long-term capital gains.
There are five
revenue tests that determine whether a rate reduction is required, beginning
with growth in revenue over the previous fiscal year, and including a series of
four additional growth measures. If any one of the incremental tests is not
met, the rate reduction does not proceed. With DOR’s certification of the most
recent revenue measure, all five tests in 2019 have now been met.
The rate reduction
was last triggered on Jan. 1, 2019, when it dropped from 5.10% to 5.05%.
Previous rate reductions included:
o Jan. 1, 2012 (rate reduced from 5.3% to 5.25%)
o Jan. 1, 2014 (rate reduced from 5.25% to 5.2%)
o Jan. 1, 2015 (rate reduced from 5.2% to 5.15%)
o Jan. 1, 2016 (rate reduced from 5.15% to 5.10)
The state budget
for Fiscal 2020 accounted for the income tax rate change, which is projected to
reduce tax revenue by approximately $88 million in Fiscal Year 2020 and
approximately $185 million in Fiscal Year 2021.
By statute, the
state charitable deduction will also be re-instituted effective the following
tax year, or January 1, 2021, because of this income tax rate reduction. The
estimated cost is $64 million in FY21 due to this change, and approximately
$300 million on a full fiscal year basis.
