Income tax cut may hurt more than help

A change in state income tax rates is drawing praise for keeping more money in taxpayers’ wallets, while others fear the move will end up costing more in public services.

“Most people will experience more loss in services than they’ll gain from a reduced-tax level,” said Harris Gruman, director of the SEIU State Council.

Meanwhile, Chip Faulkner, director for communications for Citizens for Limited Taxation, argued that the revenue cut is too small to impact services.

“I don’t see how it can [cause a reduction in services],” he said. “It’s a very small cut.”

On Jan.1 the state income tax will decrease from 5.15 percent to 5.10 percent, resulting in a decrease in state revenue of $74 million for the current fiscal year, ending June 30, 2016. Collections are estimated to be $152 million less in FY2016-2017.

This comes at a time when several organizations are experiencing budget crunches.

State revenue gaps

Earlier this year, the MBTA’s chief administrator declared that the agency faces a funding gap of $242 million in operating expenses and must generate $7 billion to pay for equipment repairs.

Proponents of the Boston Public Schools, which primarily are funded by the district and the state, repeatedly point to lack of funding. At a recent city council hearing, Jessica Tang, director of organizing for the Boston Teachers’ Union, recounted stories of teachers who had to fundraise to afford paper in the classroom or used their own money to buy water for students during a heatwave. Last month, the Foundation Budget Review Commission said that the revenue provided to schools needs to increase by millions of dollars.

The state recently has been drawing on its rainy day fund — money set aside to provide for services in case of an economic emergency — to afford services not supported by current revenue levels.

In summer 2007, Massachusetts held $2.7 billion in reserve, an amount equal to 7.8 percent of total state spending, according to the Massachusetts Taxpayers Foundation. In November this year, that amount had dropped to $1.25 billion, or approximately 3 percent of total state spending. To adequately protect the state, more than 5 percent of state spending should be reserved, states a Taxpayer Foundation press release.

“The way we’ve dealt with structural deficit is to do short-term fixes and use up our reserves as opposed to ensure we have more revenue,” Gruman said.

Sizing up $74 million

The state budget for the current fiscal year, FY2016, is $38 billion. The loss of $74 million amounts to 0.19 percent of the total budget.

“It’s miniscule,” said Faulkner, who predicts that the tax cut will give people extra spending money while having minimal effect on the state government.

“It puts more money in the pockets of taxpayers—that’s obviously a very positive benefit,” Faulkner said. “A lot people are going to use that extra money to buy Christmas presents.”

The $74 million pales in comparison to high expense areas such as Health and Human Services, which receives $20 billion, and Education, which receives nearly $7 billion.

The revenue reduction is, however, greater than the budget for Labor and Workforce Development, approximately $50 million, and also surpasses the budget for the Legislature, nearly $69 million.

Unequal effect

Because the tax decrease is a percentage of income, the measure generates greater savings for those making more, Gruman said.

The 0.05 percent reduction means an individual earning $35,000 pays $17.50 less in taxes, and an individual earning $66,500 pays $33.25 less. At the other end of the spectrum, someone making $1 million annually would save $500.

These wealthier people also are likely to be less dependent on services the tax revenue would support.

“It’s going to help people in proportion to how wealthy they are. The wealthier they are, the more they’ll gain from it,” he said. “[The lowered tax rate] will increase economic inequality and reduce the shared benefits we get form our income tax revenue.”

Personal income tax is the only major state or local tax in which higher earners pay more, notes Kurt Wise, senior policy analysts at the Massachusetts Budget and Policy Center. Other taxes, such as sales, are not scaled based on the amount of money an individual has, and so take a greater proportion of lower-earners’ wealth.

“Cutting taxes by lowering the PIT [personal income tax] rate therefore disproportionately benefits high income households and adds to the regressivity of the overall system, even as it depletes the resources available for investments in education, transportation, public safety and more,” Wise writes.

Origins of the cut

The tax cut comes as a result of a 2000 measure that voters approved, which reduced income tax from the then-level of 5.85 percent down to 5 percent. In 2002, the Legislature passed a bill that would enact this reduction gradually, in 0.05 increments each year, assuming certain economic benchmarks are met.

The first of these five economic requirements is that the baseline tax revenues for the fiscal year —adjusted for inflation — grow 2.5 percent over the previous fiscal year. In September, Mark Nunnelly, Department of Revenue commissioner, reported that the baseline tax revenues for FY2015 had more than met this, growing to 5.37 percent over FY2014.