Executive Office for Administration and Finance

State House Rooms 373 & 272 Boston, MA 02133

Tax Reform
January 2013 Administration & Finance

Administration and Finance

Our Goals
In order to invest in education, innovation, and infrastructure, the Patrick-Murray Administration proposes to generate new revenue in accordance with these principles: 1. Any proposal to generate new revenue must be comprehensive, allowing us to pay our bills, maintain what we have, and invest in new development to foster economic growth 2. Any proposal to generate new revenue for transportation must be dedicated for that purpose 3. Any proposal to generate new revenue must be competitive and fair, both allowing Massachusetts to compete with our neighbors and protecting the most economically vulnerable among us

Administration and Finance

Tax Revenue Proposal

Status Quo New Rates Policy Changes
Increase rate to 6.25% (lower rate for short term capital gains to 6.25%)
Increase personal exemption 2x Eliminate 45 tax expenditures

Revenue
$2.57B
($1.09B) $1.33B ($1.37B) $265M $76M $83M

Personal Income

5.25%
$4,400/ $6,800/ $8,800*

6.25%
$8,800/ $13,600/ $17,600*

$2.81B

Sales

6.25%

4.50%

Lower rate to 4.50% Tax custom modifications to canned software and related computer services

($1.10B)

Corporate Income

8.00%

8.00%

Eliminate FAS 109 deduction Eliminate special classifications for security and utility corporations

$194M

Implement sales factor sourcing for services

$35M

Total

$1.90B

*Personal exemption for Single/Head of Household/Joint filers.

Administration and Finance

Impact to People
Average Tax by Income Quintile
$25,000 Avg. Income Tax Avg. Sales Tax $20,000
$1,700

Effective tax rates (sales and personal income) Net Adjusted Gross Income Quintile Income Status Quo New Policy 0-20% <$21,570 6.56% 5.10% 20-40% $21,570 to $37,523 5.43% 5.14% 40-60% $37,523 to $60,414 5.63% 5.80% 60-80% $60,414 to $102,886 5.56% 6.05% 80-100% >$102,886 5.48% 6.49% Total 5.63% 6.27% Note: This analysis does not include ~270,000 households that do not file income taxes. Excludes capital gains.

$15,000

$2,300

$10,000
$17,600 $13,900

$5,000
$1,000$800

$1,000 $1,400

$-

$500 $400 $400 $300

$700 $500 $1,100 $1,000

$2,300 $1,900

$4,300 $3,500

Administration and Finance

Allocation of New Tax Revenue: FY14-FY18 and FY23

Uses of New Tax Revenue by Fiscal Year ($Ms- Before Inflation) FY14 New Revenue 779 Investments Transportation Education Innovation Total New Spending FY15 1,900 FY16 1,900 FY17 1,900 FY18 1,900 FY23 1,900

231 912 36 1,179

600 975 50 1,625

700 975 100 1,775

755 1,020 125 1,900

755 1,020 125 1,900

755 1,020 125 1,900

(Issue)/Repay Revenue Note

400

(275)

(125)

Administration and Finance

Transportation Need for New Tax Revenue

FY14-FY23 Transportation Financing Gap from The Way Forward Report
Periodic, consistent fare/fee/toll increases (maintain real impact) and Western AET savings

MassPort / Gaming / Convention Center contributions

Indexing gas tax to inflation (maintain real impact)

FY14

FY15

FY16

FY17

FY18

FY23

$231M*

$600M

$700M

$755M

$755M

$755M
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*FY14 allocation reflects items that can be implemented immediately and the launch of the capital program.

Administration and Finance

Transportation Need: Solutions from Current Tools

(Not Including Gas Tax)
Solutions ($Ms) MBTA Fares RMV Fees Tolls Western Turnpike AET Savings MassPort Other Contributions Gaming Convention Center Total Notes MBTA Fares RMV Fees Tolls Western Turnpike AET Savings MassPort Other Contributions Gaming Convention Center FY14 25 25 FY15 27 17 10 12 66 FY16 27 55 17 50 10 159 FY17 57 56 35 51 11 50 10 270 FY18 57 57 36 53 11 51 10 275 FY19 89 58 55 54 11 53 11 330 FY20 90 60 56 55 11 54 11 336 FY21 124 128 77 57 12 55 11 463 FY22 125 131 78 58 12 57 11 472 FY23 162 134 101 59 12 58 12 538

5% biennial fare increase beginning in FY15. Increases fare revenue 27% over baseline by FY23. 10% fee increase every five years beginning in FY16. Increases fee revenue 20% over baseline by FY23. 5% biennial fare increase beginning in FY15. Increases fare revenue 27% over baseline by FY23. Preliminary estimate. Preliminary estimate. One-time available in FY14 (2/3rds). Recurring amount available in FY17. Preliminary estimate.

Administration and Finance

Transportation Need: Solutions from Indexing Gas Tax

Current Policy Motor Fuels Tax Collections Motor Fuels Tax ($Ms) $ 0.2100 $ 664 $ 0.2100 $ 660 $ 0.2100 $ 661 $ 0.2100 $ 669 $ 0.2100 $ 674 $ 0.2100 $ 677 $ 0.2100 $ 681 $ 0.2100 $ 685 New Policy (Index to Inflation) Motor Fuels Tax New Motor Fuels Collections Revenue Tax ($Ms) ($Ms) $ 0.2142 $ 677 $ 13 $ 0.2185 $ 686 $ 27 $ 0.2229 $ 702 $ 40 $ 0.2273 $ 724 $ 55 $ 0.2319 $ 744 $ 70 $ 0.2365 $ 763 $ 85 $ 0.2412 $ 782 $ 101 $ 0.2460 $ 802 $ 118

Fiscal Year FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Indexing the gas tax to inflation, beginning in FY14, would generate $118M in additional revenue by FY21.

Note: Analysis assumes 2% annual inflation.

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30

40

50

60

20

47 c/gal

60 c/gal

Fully funding the transportation investment would require increasing the gas tax to 60 cents per gallon (47 cents after solutions from current tools).

Data source: Federation of Tax Administrators.

Administration and Finance

Gas Tax

Total Gasoline Tax (Cents per Gallon)

California North Carolina Washington West Virginia Rhode Island Wisconsin Pennsylvania Maine Oregon Minnesota Ohio Kentucky Nebraska Montana Vermont Idaho New York Connecticut Utah Kansas South Dakota Nevada Maryland Delaware North Dakota Colorado Iowa Arkansas Tennessee Massachusetts Georgia Louisiana Illinois Texas New Hampshire Michigan Arizona New Mexico Federal Mississippi Indiana Alabama Virginia Missouri Hawaii Oklahoma South Carolina Florida New Jersey Wyoming Alaska

Administration and Finance

Public Infrastructure Fund

All sales tax will go to a new Commonwealth Public Infrastructure Fund Including amounts already pledged to the School Building Authority, the MBTA, and MassDOT Amounts pledged to the School Building Authority, the MBTA, and MassDOT pass-through the fund without harm to funds or bonds supported by those funds Amount pledged to MassDOT will be increased to cover transportation gap The fund may be used for direct expenditure by the Commonwealth, grants, or debt service related to any public infrastructure The fund is not intended for governmental infrastructure such as state offices or information technology, soft assets such as master plans, or administrative costs such as payroll
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Administration and Finance

Sales Tax Dedicated Entirely to Transportation and Infrastructure

Allocation of Sales Tax
5.00 4.50

4.00
Cents on the Dollar 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Other Infrastructure FY14 2.15 0.23 1.12 FY15 1.69 0.69 1.12 FY16 1.57 0.81 1.12 FY17 1.50 0.88 1.12 FY18 1.50 0.88 1.12 FY23 1.50 0.88 1.12 Transportation ranges from 1.02 to 1.32 cents for FY15FY23 (2.14 to 2.44 cents including the MBTA).

Transportation Gap
MBTA MSBA

1.00

1.00

1.00

1.00

1.00

1.00

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Administration and Finance

Economic Competitiveness: Comparison to Other States

Highlighted comparison states include neighbors (CT, ME, NH, RI, VT), industry competitors (CA, NJ, NY, OH, PA), and those ranked best for business (CO, GA, NC, VA, TX).

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Administration and Finance

Economic Competitiveness: Comparison to Other States

Highlighted comparison states include neighbors (CT, ME, NH, RI, VT), industry competitors (CA, NJ, NY, OH, PA), and those ranked best for business (CO, GA, NC, VA, TX).

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Administration and Finance

Personal Tax Expenditures

Proposal eliminates 45 personal tax expenditures This simplifies the tax code If the goal is also a fairer tax code, reducing the sales tax and doubling the personal exemption is a more efficient way to achieve that result than retaining these personal tax expenditures Impacts on individuals must be considered in light of all tax changes in the proposal, including reducing sales tax and doubling personal exemptions

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Administration and Finance Personal Income Tax Expenditures: Proposed for Elimination
TE Budget Code Tax Expenditure 1.001 Exemption of Premiums on Accident and Accidental Death Insurance 1.002 Exemption of Premiums on Group-Term Life Insurance 1.003 Life insurance interest 1.010 Exemption of Workers' Compensation Benefits 1.011 Exemption of Dependent Care Expenses 1.012 Exemption of Certain Foster Care Payments 1.013 Exemption of Payments Made to Coal Miners 1.014 Exemption of Rental Value of Parsonages 1.015 Exemption of Scholarships and Fellowships 1.016 Exclusion of Certain Prizes and Awards 1.017 Exemption of Cost-Sharing Payments 1.018 Exemption of Meals and Lodging Provided at Work 1.019 Treatment of Business-Related Entertainment Expenses 1.020 Exemption of Income from the Sale, Lease or Transfer of Certain Patents 1.021 Capital gains on home sales 1.030 Parking, T-pass, and vanpool fringe benefits 1.031 Health Savings Accounts (exemption) 1.032 Employer-Provided Adoption Assistance 1.033 Employer-Provided Education Assistance 1.034 Qualified Retirement Planning Services 1.035 Department of Defense Homeowners Assistance Plan 1.039 Discharge of Indebtedness for Health Care Professionals 1.040 Archer Medical Savings Accounts (exemption) 1.201 Capital Gains Deduction 1.202 Deduction of Capital Losses against Interest and Dividend Income 1.312 Expensing of Certain Capital Outlays of Farmers 1.401 Deduction for Employee Contributions to Social Security and Railroad Retirement System 1.402 Deduction for Employee Contributions to Public Pension Plans 1.405 Dependents Exemption where the Child Earns Income 1.406 Deduction for dependents under 12 1.407 Personal Exemption for Students Aged 19 or Over 1.408 Deduction for Adoption Fees 1.409 Deduction for Business-Related Childcare Expenses 1.412 Nontaxation of Charitable Purpose Income of Trustees, Executors or Administrators 1.413 Exemption of Interest on Savings in Massachusetts Banks 1.414 Tuition Tax Deduction 1.415 Charitable Contributions Tax Deduction 1.418 Deduction for Costs Involved in Unlawful Discrimination Suits 1.420 Archer Medical Savings Accounts (deduction) 1.421 Clean-Fuel Vehicles and Certain Refueling Prop. 1.422 Health Savings Accounts (deduction) 1.423 Commuter Deduction 1.601 Renewable Energy Source Credit 1.602 Credit for Removal of Lead Paint 1.606 Septic System Repair Credit Revenue $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 24 12 211 8 9 3 2 19 8 240 39 8 0 300 136 8 0 15 5 36 12 7 1 3 13 Source Beneficiaries I.R.C. 1,970,000 I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. 255,000 I.R.C. I.R.C. I.R.C. I.R.C. M.G.L. I.R.C. 55,000 I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. M.G.L. M.G.L. I.R.C. M.G.L. 3,585,000 M.G.L. I.R.C. / M.G.L. M.G.L. 510,000 I.R.C. / M.G.L. M.G.L. 1,000 I.R.C. / M.G.L. 54,000 M.G.L. M.G.L. 505,000 M.G.L. 65,000 M.G.L. I.R.C. I.R.C. I.R.C. I.R.C. 10,000 M.G.L. 225,000 M.G.L. 2,000 M.G.L. 1,850 M.G.L. 11,000

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Administration and Finance Personal Income Tax Expenditures: Retained

TE Budget Code Tax Expenditure Needs-Based 1.404 Additional Exemption for the Blind 1.008 Public assistance benefits 1.403 Elderly 1.609 Senior property tax circuit breaker Supports Working Families 1.411 Rent deduction 1.425 Student loan interest, undergrad interest deduction 1.605 Earned income credit Retirement 1.005 Exemption of Annuity or Pension Payments to Firemen and Policemen 1.006 Pension and annuity distributions 1.007 Exemption of Railroad Retirement Benefits 1.009 Social Security benefits 1.101 Employer contributions to private pension plans 1.104 Exemption of earnings on IRA and Keogh plans Health 1.004 Employer contributions to health insurance 1.424 Self-employed health insurance 1.410 Medical expenses 1.426 Expenses of Human Organ Transplant Public Safety and Armed Services 1.028 Exemption of Income Received by Persons Killed in Military Action or Terrorist Activity 1.036 Survivor Annuities of Fallen Public Safety Officers 1.037 Survivor Annuities of Fallen Astronauts 1.038 Discharge of Indebtedness for Victims of Terrorism 1.419 Business Exp of National Guard and Reserve Members 1.024 Exemption of benefits and allowances to armed forces personnel 1.025 Exemption of veterans' pensions, disability compensation, and G.I. benefits 1.026 Exemption of military disability pensions 1.027 Exemption of Compensation to Massachusetts-Based Nonresident Military Personnel 1.029 Exemption for retirement pay of the uniformed services Revenue $ $ $ $ 1 230 26 78 Source Beneficiaries TE Budget Code Tax Expenditure Preempted by Federal Law M.G.L. 10,000 1.103 Exempt of Earnings on Stock Bonus Plans or Profit Sharing Trusts M.G.L. M.G.L. 495,000 Mirrors Corporate Code M.G.L. 82,000 1.203 Excess Natural Resource Depletion Allowance 1.204 Abandoned Building Renovation Deduction 1.301 Accelerated Depreciation on Rental Housing M.G.L. 770,000 1.303 Accelerated Depreciation on Buildings (other than Rental Housing) M.G.L. 345,000 1.304 ACRS for Equipment M.G.L. 1.305 Deduction for Excess First-Year Depreciation 1.306 Five-Year Amortization of Start-Up Cost 1.308 Expensing of Exploration and Development Costs M.G.L. 1.309 Expensing of Research and Development Expenditures in One Year M.G.L. 1.310 Five-Year Amortization of Pollution Control Facilities M.G.L. 1.311 Seven Year Amortization for Reforestation M.G.L. 1,200,000 1.610 Historic Buildings Rehabilitation Credit I.R.C. 1.611 Film Credit, Payroll and Production M.G.L. 1.613 Medical Device Credit 1.614 Dairy Farmer Tax Credit 1.615 Conservation Land Tax Credit I.R.C. 1,200,000 1.607 Low Income Housing Tax Credit I.R.C. 95,000 1.608 Brownfields Credit I.R.C. / M.G.L. 185,000 1.603 EDIP/Economic Opportunity Area Credit M.G.L. 1.604 Credit for Employing Former Full-Employment Program Participants Other 1.022 Nontaxation of capital gains at death 1.023 Interest from Massachusetts obligations 1.102 Treatment of Incentive Stock Options 1.106 Nontaxation of capital gains at the time of gift Revenue $ Source - M.G.L. Beneficiaries $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0 4 20 6 47 8 5 1 3 3 0 0 2 2 3 3 I.R.C. M.G.L. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. M.G.L. M.G.L. M.G.L. M.G.L. M.G.L. M.G.L. M.G.L. M.G.L. M.G.L. 80 50 30 200 220 60 280 250

$ $ $

116 29 132

$ $ $ $ $ $

280 5 839 959 326

$ $ $ $

943 44 78 1

$ $ $ $ $ $ $ $ $ $

24 30 1 9 26

M.G.L. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. I.R.C. M.G.L. M.G.L.

365,000 3,200 19,000

$ $ $ $

1,217 99 124

I.R.C. M.G.L. I.R.C. I.R.C.

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Administration and Finance

Corporate Tax Breaks

Tax Break FAS 109 Security and Utility Corp. Classifications Sales Factor Sourcing for Services Custom modifications to software and other computer services Annual Revenue $ 76 $ 83 $ 35 $ 265

Within the category of computer systems design and related services, 29 other states tax modifications to canned programs, and 14 other states tax custom programs With the migration of software first to the web and now to the cloud, the line between software (currently taxable) and computer services (not taxable) is becoming untenable, and making these distinctions is difficult both for DOR and taxpayers

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