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Gov. Deval Patrick’s plan to cut tax breaks, boost education

Nearly $2 billion in personal income tax breaks, claimed by millions of Massachusetts families and single residents, are on the chopping block in Gov. Deval L. Patrick’s controversial state budget proposal — a high-stakes overhaul of the Bay State’s tax code.

Now, the impact of such a change is being hotly debated.

Claiming a tax break, or exemption, reduces how much of a person’s income the state can tax. The 44 personal income tax exemptions up for elimination include a deduction for having a child under age 12, tax-free scholarships and tax-free retirement savings.

As an example of how far-reaching some of the exemptions facing the ax are, about 3.6 million Massachusetts residents claim the deduction for employee contributions to Social Security and the Railroad Retirement System — a perk that kept $301 million in income tax out of state coffers last year — and 510,000 claim the deduction for having a child under 12, according to the Executive Office of Administration and Finance.

The proposed cuts to taxpayer exemptions comes at a time when the state’s tax code is under scrutiny. In 2011, the Department of Revenue reported Massachusetts doles out more in tax breaks than it takes in through taxes. In 2011, the state handed out $24.1 billion in personal, sales and corporate tax exemptions. A commission was formed last year to study Massachusetts’ tax codes and make recommendations on how the state’s 223 exemptions could be more effectively maintained and reviewed.

The commission also suggested a more rigorous evaluation process before an exemption is added to the tax code.

Patrick’s plan, which is rolled into the governor’s state operating budget proposal for the coming fiscal year, also includes an income tax increase and a sales tax decrease. There are corporate tax cuts proposed as well.

The point of the tax change is to improve and simplify the tax code and raise $1.9 billion in new tax revenue that could then be invested in public education and transportation infrastructure, said Secretary of Administration and Finance Glen Shor.

“Some people will lose itemized deductions, but everyone will benefit from the decrease in the sales tax and the doubling of personal exemptions,” Shor said. “Taxation will be better based on people’s ability to pay.”

Shor said just looking at the tax exemption cuts does not paint an accurate picture of how proposed changes to the tax code would affect residents. If the governor’s plan is approved by the Legislature and fully implemented, taxes for about half the state’s population would decrease or stay the same, he said. But critics say it isn’t clear what impact the plan would have on families or the state’s economic recovery.

“It’s hard to say what an average impact would be because there are so many different exemptions and deductions eliminated that are used by such a large number of residents,” said Carolyn C. Ryan, the policy analyst at the Massachusetts Taxpayers Foundation who wrote a report on the governor’s revenue proposal.

Patrick’s tax plan is far from set. In the coming months the House and Senate will pick it apart and create their own state operating budget proposals, which may contain some, all or none of the governor’s tax plan. A final budget, approved by the House and Senate and signed by the governor, is to be completed by July 1.

The tax code overhaul is important to the Patrick administration — so much so that the governor is going to marketing lengths he “hates” to promote it. Last weekend, a robocall from Patrick to the 110,000 members of the Massachusetts Teachers Association was placed, asking educators to contact their representatives and support the proposal. The call was paid for by the Massachusetts Teachers Association and recorded at the request of the union’s president, Paul Toner, Patrick told a reporter for the Patriot Ledger.

“I hate robocalls,” Patrick said to the paper, something he made clear on the robocall, which he closed by saying, “And thank you for your patience with the robocall. I hate ’em like you do, but I need your help. Thank you.”

In the plan

Proposed personal income tax exemption and deduction cuts would make up the majority of the $1.9 billion in new tax revenue raised through Patrick’s plan.

Eliminating 44 personal tax exemptions is expected to generate $1.08 billion for the state coffers, according to an analysis by the Massachusetts Taxpayer Foundation.

If fully implemented, the governor’s proposal would also:

∎ raise the personal income tax rate, from 5.25 percent to 6.25 percent and double the personal tax exemption, moves that are expected to generate $1.5 billion in new revenue;

∎ reduce the sales tax, from 6.25 percent to 4.5 percent, for a loss of $1.4 billion. (The governor’s office has characterized the raising of the personal income tax rate and lowering of the sales tax rate as a “wash.”)

On the business side of the tax code changes, the governor’s proposal would:

apply the sales tax to customized computer software as well as computer and data processing services, for a gain of $265 million;

reclassify security and utility corporations as corporations or financial institutions, for a gain of $83 million;

limit the film tax credit to $40 million per year, for a gain of $40 million.

Ryan, the policy analyst, said critics have suggested that some aspects of the governor’s plan seem to be at odds with his stated priorities. While Patrick is proposing to invest in education and transportation, he is also asking to cut tax exemptions that support these endeavors. Generally, a tax expenditure is a provision that includes exemptions, exclusions, deductions, credits and other features that provide an economic benefit to certain taxpayers or encourages specific economic, social or other activities.

“Some people are pointing out that the number of exemptions and deductions that he’s eliminating don’t seem to align with the other parts of the plan, the principles laid out in the plan for education and transportation,” Ryan said.

There are also people who question the impact the governor’s plan could have on businesses.

Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, said because Massachusetts is a high-cost state for doing business, he is concerned any increase to the corporate tax code could hurt economic growth. According to the Business Leaders for Michigan’s 2012 Economic Competitiveness Benchmarking Report, the cost of doing business in Massachusetts is 22 percent higher than the national average.

“Obviously, we’re in a fragile economic time, so it’s a particularly difficult time to be adding to the costs borne by corporations,” Widmer said. “It just compounds the problem, so I hope the Legislature will take a careful look at these and not include them in any package.”

Shor, the administration and finance secretary, said the changes are necessary to improve the economy in addition to making the tax code simpler and more fair. As much of the money generated under the governor’s proposal would be invested in transportation infrastructure and education, the plan is a boon to businesses.

“These are not investments that maintain the status quo, these are game changers,” Shor said. “We’re focused on education and transportation because both promote growth and that is the cornerstone of prosperity and opportunity in Massachusetts.”

For a full list of the personal tax exemptions slated for elimination in Gov. Patrick’s budget proposal, click here.

Related

Exemptions on the block

Thursday, June 27, 2013

The following is a list of some of the 44 specific personal income tax exemptions proposed for elimination under Gov. Deval L. Patrick’s state operating budget proposal and how much getting rid of the tax break would generate for the commonwealth. ∎ Deduction for employee Social Security and Railroad Retirement System payments; a gain of $301.3 million ∎ Exemption of …

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