State Income Tax to Drop for Sixth Time This Decade
BOSTON — Massachusetts residents are getting some income tax relief in the new year with individual rate dropping to its lowest in years thanks to a state law passed nearly two decades ago.
Gov. Charlie Baker on Friday said the state's Part B individual income tax rate will be reduced from 5.05 percent to 5 percent effective Jan. 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 percent based on certain state revenue milestones, and will return $88 million in fiscal 2020 and approximately $185 million in fiscal 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 Baker in a statement. "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."
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 percent. The legislation replaced a tax rate reduction schedule that had passed by ballot initiative in November 2000.
"We are pleased that the necessary revenue benchmarks have been met and the income tax rate is being fully reduced to 5 percent," said Lt. Gov. Karyn Polito. "This tax cut reflects steady economic growth and will provide a well-deserved break to Massachusetts workers."
Administration and Finance Secretary Michael J. Heffernan said the reduction was incorporated into the assumptions for fiscal 2021 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 percent to 5.05 percent. Previous rate reductions included:
- Jan. 1, 2012 (rate reduced from 5.3 percent to 5.25 percent)
- Jan. 1, 2014 (rate reduced from 5.25 percent to 5.2 percent)
- Jan. 1, 2015 (rate reduced from 5.2 percent to 5.15 percent)
- Jan. 1, 2016 (rate reduced from 5.15 percent to 5.10)
By statute, the state charitable deduction will also be re-instituted effective the following tax year, or Jan. 1, 2021, because of this income tax rate reduction. The estimated cost is $64 million in fiscal 2021 due to this change, and approximately $300 million on a full fiscal year basis.
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