The reform concept: Families that have incomes below a livable level — as judged by the legislature and the agencies responsible for the various subsidy programs — shouldn’t be paying income tax. Yet, they do. Under current law, a family of four with an income of $50,000 — eligible for housing, heating and health subsidies — pays 5.3% on a taxable income of roughly $30,000 ($50,000 less roughly $20,000 in exemptions and deductions) or roughly $1,500 per year.
Background — tax computations: The tax rate for most income in Massachusetts is 5.3%. Income tax liability is computed based on taxable income — actual income less exemptions and deductions. For a family of four, the personal exemption would be $8,800 plus $1,000 for each child; additional deductions might total approximately $10,200 if the family were living in rental housing. So, under current law, a family of four might have a total of $21,000 in exemptions and deductions which would reduce their taxable income. For a collection of resources, citations and exact deduction amounts, click here.
Background — economic need: In Massachusetts, persons of limited income may receive subsidies to support purchase of necessities — housing, health insurance, home heating. Eligibility thresholds constitute a public policy judgment on what level of income is adequate to support family life. A family of four is eligible for some types of housing subsidies if they make less than 80% of the area median income, which comes out to $66,150 in the Boston area. Health insurance subsidies are available for the family at incomes below $63,612. Heating assistance is available for the family at incomes below $53,608.
Possible specifics for the reform: If a married couple’s exemption were increased from $8,800 to $40,000, and dependent exemptions were increased from $1,000 to $5,000, our family of four with income of $50,000 would pay no income tax and save $1,500 per year. Based on on DOR simulation of similar proposals, to pay for this relief, the tax rate would have to go to somewhere close to 7.5%. The combined effect of the increased exemptions and the increased rate would be to reduce taxes on families up to a breakeven level of approximately $140,000. Families above that level would see an increase which would work out to approach almost 2.5% of their income for the wealthiest families. For a tax impact calculator, click here. Exemptions for a single person would be $20,000 (for a head of household, $30,000) if we wished to preserve the current proportionality of exemptions. In a scenario along these lines, the vast majority of taxpayers would see a decrease in taxes paid — only the top 15 to 20 percent would see an increase.
Legal issues for the proposal: The Massachusetts constitution allows only a single rate for any class of income, but it allows reasonable exemptions. Would an exemption of this magnitude be reasonable? In Massachusetts Taxpayers Foundation, Inc. v. Secretary of Administration, 398 Mass. 40, 494 N.E.2d 1311 (1986), the Court determined that a graduated system of personal exemptions was unconstitutional. But the court’s determination seemed to turn on the complex graduation mechanism, which seemed a backdoor to an unconstitutional progressive tax. In an earlier case, Opinion of the Justices, 270 Mass. 593, 170 N.E. 800 (1930), the court found that an exemption of $3,000 for a married couple was not unreasonable, although it might be close. (This opinion is not available online, but is quoted at length in the previous opinion.) In 2008 dollars, a $3,000 exemption would equate to $39,000, according to the Bureau of Labor Statistics. Based on the multiple findings by the legislature and agencies that an income in the vicinity of $50,000 for a family of four is not livable and that a family at this level needs income assistance, the Supreme Judicial Court would have good grounds to find that a substantial exemption as proposed is reasonable.
Legislative Process around the proposal: A proposal along these general lines is likely to be filed in the coming session. If there is an adequate level of interest, The Joint Committee on Revenue will fully vet the proposal in collaboration with the Department of Revenue. If interests builds and a consensus proposal emerges, it will probably make sense to seek an advisory opinion from the SJC. If the exemption increase is substantial, as outlined here, the necessary increase in the rate to achieve revenue neutrality will also be substantial. A substantial rate increase will raise political concerns, even if a large majority of taxpayers will see a net decrease in taxes. One solution might be for the legislature to vet the proposal fully and place it on the ballot for voter consideration.