Income Tax Relief for Low and Middle Income Families

Thirty percent of voters said Yes to the recent proposal to eliminate the income tax.  Of course, No was the right answer — the proposal was reckless.  But the Yes voters included many low and middle income families who truly are substantially burdened by the state income tax.

Some in the legislature are discussing a proposal to dramatically increase the personal exemption, so as to provide complete income tax exemption for families who make less than the eligibility thresholds for major public assistance programs — housing, heating and health care.  To pay for this exemption without net revenue loss, it would be necessary to increase the tax rate.  The net effect would be reductions in taxes for families up to a fairly high level, with increases for families at the highest income levels ($150,000 and up).

See the extended text for additional background and detail.  Reactions would be appreciated.


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.

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30 Comments . Leave a comment below.
  1. amend the constitution

    As David has suggested before, it sounds like it's time to get the ball rolling on amending the constitution to eliminate the flat tax constraint.

    • I like Rep. Brownsberger's idea better

      since it may actually be (a) feasible in the short run and (b) something that voters would want.

      It would certainly change the dynamics of the whole tired tax debate for the better.

  2. EITC

    It would seem another possibility would be to further the expand the Massachusetts Earned Income Tax Credit, which I believe is currently set at 15% of the federal EITC. Raising the percentage would help target income to those who need it most.

    All in all, the proposal in this diary appears to be much more politically feasible than a constitutional amendment, which has already been rejected by voters in the past.

    • $quot;more feasible$quot; an understatement

      For a constitutional amendment & graduated tax rates you need

      1) adoption by the legislature

      2) adoption again by the next session of the legislature

      3) adoption by the voters

      Time required from today: 4-8 years. Then you still need

      4) enactment of new tax rates by the legislature

      5) signature into law by the Governor, whoever he may be by then.

      Consider that the requirements for Brownburger's plan are a subset of this process--if the courts are satisfied--which could be realized this year.

      Debate the wisdom all you want, but the question of which is more feasible answers itself.

      • we could push

        another attempt at a progressive income tax through. In fact, it's inevitable that we will. (I'd also say it's inevitable this will eventually pass - and perhaps sooner than we'd think if we keep having these budget nightmares.)

  3. double the fun

    What do you think are the politics of having two tax increases on the highest bracket -- a federal tax per the Obama plan, and then a state tax also, per your plan?  

    • None

      If this actually gets into the discussion based on fact and NOT spin and rhetoric, the rich people in this state (and the country) are a bloody minority. They shouldn't be able to upend decent tax law.

      Frankly, I am so sick to death of the whining that someone making $200K+ supposedly does about this sort of tax structure. A second home on the Cape and you think this is a hardship? Please. Anyone making above and beyond what is necessary to pay for shelter, food, clothing and a decent life is doing just fine, thanks. A $300 increase in your taxes isn't going to break your bank.

      Of course, all the whining I ever see is from people who would BENEFIT from these tax law changes, so I REALLY REALLY don't get it. It's like some strange version of the Stockholm Syndrome or something. Yeesh.

      Warren Buffet is a role model. HE doesn't whine about paying fair taxes.

      • i don't understand your response

        my question: "what are the politics?"  ie, how does he predict the spin and rhetoric would play out?  

        you essentially answer a different question -- what if there were no such thing as politics (ie, spin and rhetoric)? -- so why attach it to my question?  

        • I think there could be none

          I answered your question. Right in my title.

          IF this gets framed the right way, and people understand that they (unless they make more than 150K) will see a tax cut. It's working in the rhetoric on the national level, people are interested in seeing the restoration of the progressive tax levels. They are sick of CEOs of large corporations getting away with not paying their fair share.

          Maybe 10 years ago, your question would have to be answered differently. But the resounding rejection of the income tax repeal, the framing already done by candidate-then-Governor Patrick and President-Elect Obama, has entirely changed the conversation. The only thing we have to do is be boots on the ground to ensure the conversation doesn't go backwards. Obviously you can't be complacent, but I think you are operating in an old paradigm.

          People have rejected the old Republican memes, because they see where they've gotten us - an ever-widening gap between rich and poor, an eroding middle class, and beyond now that we're seeing the entire thing melt down.

          Reaganism is dead.

          • I think we have a new winner of the unintended irony award

            a comment that starts by requesting just the facts without spin and rhetoric, then the rest of that comment and a second follow up comment entirely devoted to spin and rhetoric. If you're looking for real facts then you can see my comment below.  

    • Taxpayers in the top tax bracket

      would get an additional deduction for federal purposes for an increase in MA taxes paid, and that deduction would become even more valuable as the federal rate increases. As long as they are not hit by the AMT, increasing the MA rate at the same time as an increase in the federal rate would actually blunt the increasedburden on many high income individuals.

      An increase in the MA tax rate along with the top federal rate would also increase demand for MA bonds, which would create income exempt from both federal and state taxation.  

  4. Increase Revenue, but not at the expense of the working class

    I'm in favor of the idea of raising the personal exemption, because it does have the effect of making our income tax more progressive (though it's not all that bad as it is, except at the top end).

    However, the downside to this proposal is that it CUTS state revenues just at a time when, as Judy M. points out, we need to fully fund the programs we've already committed to, let alone tackle new solutions to educational and social needs that we all know are so pressing.

    So, I say the tradeoff should be to raise the exemption (and perhaps other fiddling, such as with the EITC and restoring the full tax rate to income from dividends and income, with a circuit-breaker to protect seniors and others who depend on these sources of income to live on), while at the same time raising the general income tax rate. To, say, 6%.

    I'm not sure what the numbers should be, but I'm sure the MBPC or other groups could do a study to show the tradeoffs. The end result should be to have a MORE progressive tax structure AND to produce increased revenues for the state. If we do only one or the other, we do a great injustice to those at the bottom of the economic ladder.

    I'm also in favor of a constitutional amendment, but see these as parallel efforts that are not mutually exclusive. We should do both.  

    • Michael,

      Isn't that what he's proposing here? A revenue-neutral change to the exemptions, with an increase in the tax rate to offset it, that will only begin to affect those making more than $140K (with only people making more than $160K seeing more than a $500 tax increase)?

      • Ya think?

        Sorry, I have trouble reading all the polician-speak -- lots of "ifs" and "would have to"s and the like. It all sounds very hypothetical and I don't know what his real proposal is.

        As it turns out, before I could answer your query, he put out an clarification that he is looking for a "revenue neutral" bill that would increase fairness. I am opposed to that on the surface -- I can't imagine an income tax increase from 5.3% to 7.9% that has no impact on the state's fiscal crisis is going to get much traction (or even survive judicial review).

        That said, I also don't believe what he is proposing is "revenue neutral" -- far from it. It is well known that persons farther down the economic ladder have a higher marginal propensity to spend additional income than do people of substantial means. Therefore, putting additional money in the pockets of the less fortunate in our society (a noble goal in and of itself) would also, imho, have a HUGE stimulative effect on our economy, creating income growth as people spend money at local businesses, thereby generating higher income tax revenues. Life, fortunately, is not one-dimensional. Well, okay, it has been for the past 8 years, but things are different now!

  5. I think

    this is a most excellent proposal. Frankly, I see the chances - progressive movement or not - of a constitutional amendment as really, really difficult. Maybe not impossible, but given how quickly any discussion about changing the tax law turns into spin from the anti-tax rich people, I think this thinking outside that box is a great way to achieve something akin to a progressive income tax with a whole lotta less leg work.

    Barring any bothersome elements I can't see right now, I'd hop on this bandwagon before you could say "go." And not just because my family would stand to gain a huge tax break (though, that certainly does NOT hurt! we could really use that money just like anyone else).

  6. Could we get a clarification from Rep Brownsberger

    you say that this plan would not create a net revenue loss. Judy Meredith and Ryepower seem to be under the impression that this plan will result in a net revenue increase, while Michael Wilcox seems to be under the impression that this plan would result in a revenue loss. The initial post focuses more on the effect on hypothetical taxpayers then it does on the big picture revenue impact.

    Rep Brownsberger, what is the revenue projection of this plan? How current are the numbers used to create the projection? Is it your intent for the plan to be revenue neutral?

  7. Thank for you for this first round of comments!

    Here are some responses:

    (1) The concept is to increase the exemption dramatically to provide relief for persons of limited income and to increase the rate to assure at least revenue neutrality.  At an increase of the exemption to $50,000 (for our family of four, with corresponding changes for other households), the rate increase would need to be to the 7 to 8% level to be revenue neutral.  I base this rough estimate on a simulation which DOR did earlier this year on a variation of this proposal.

    (2)  If the political will were there to raise revenue, each point on the rate would raise something near $1.3 billion.  What a point raises is, in part, a function of what the exemption changes are.

    (3)  I expect we'll file a revenue neutral bill.  The initial goal is to make the system fairer.  A conversation about further raising the rate to achieve a net revenue increase would happen in the much larger context of the budget process.  I'm interested in people's thoughts about how the fairness and revenue conversations interact politically.

    (4)  One person mentioned the EITC.  I agree that this would make sense as an additional part of a package. This would help working people at the lowest income levels, who are not helped by an increase in the exemption (since they are already in no tax status).  My only reservation is that I am not sure how a more substantial EITC would be perceived by the SJC; if this has been litigated already, I haven't come across it.  If we are seeking an advisory, we could ask.

    (5)  Good point made about the offset that high income taxpayers would receive on their federal taxes.

    I'm very grateful for the reactions and I hope that the conversation continues. Thanks again.

    • how the fairness and revenue conversations interact politically.

      (3)  I expect we'll file a revenue neutral bill.  The initial goal is to make the system fairer.

      ok, fair enough

      A conversation about further raising the rate to achieve a net revenue increase would happen in the much larger context of the budget process.  I'm interested in people's thoughts about how the fairness and revenue conversations interact politically.

      Me too.

    • Do you have any numbers

      such as: 1) Total number of tax returns filed in MA now 2) Of those, total number of folks paying any income tax (not necessarily at April 15; one may pay income tax through payroll deduction and receive a refund of part of it in April) 3) Total number of tax returns filed if your proposal becomes law 4) Total number of folks paying any income tax if your proposal becomes law 5) Number of jobs at the DOR that could be eliminated due to less incoming returns.

      • Sorry I didn't get back to these questions sooner

        There are about 3.4 million returns filed in MA annually, of which 0.5 million are in no tax status.  The number having any liability would be cut roughly in half.  The impact on filings would depend on policy choices about filing requirements -- current the income tax filing is the enforcement mechanism for health care reform.

  8. raise incomes, not taxes

    Like the authors of the Massachusetts constitution, I believe that everyone should pay their fair share of state taxes. A dramatic increase in the deduction and the income tax rate erodes that principle. Instead of inventing tax schemes to redistribute wealth, we should focus on ways to make it easier for low-income families to increase their income. For example, we could double the minimum wage. Property tax (which disproportionately burdens middle-income people) could be lowered by allowing towns to add a percentage to the local income or sales tax rates.  

    • Why do you frame these as mutually exclusive?

      If you raise taxes, you raise incomes, by definition. What do you think the state does with additional tax dollars? Burn them? No, they're used to create jobs, buy services, etc., pouring money back into the local economy and generating -- yes -- income!

      Please explain how "tax schemes" "redistribute wealth" -- doubling the minimum wage would be wealth redistribution -- you're taking it out of the pockets of business owners and giving it to workers. Tax collections don't redistribute wealth -- they simply assess each citizen their fair share of the cost of living in a just and prosperous society.

      That said, I don't dismiss your call to redistribute wealth; though I think the concept of a living wage makes more sense than some arbitrary increase.

      If property taxes unfairly fall on middle-income people, as you suggest, the solution is to restructure the way taxes are assessed. Creating new sources of revenue for localities is a great idea, but how do we know they will be used to ameliorate property taxes? These things don't just happen.  

      • fairness versus social outcome

        We're simultaneously seeking "fairness" and "positive social outcome", but the two concepts don't necessarily point to the same solution for state revenue collection. Progressive income tax produces a desirable social outcome: moving wealth to lower-income families. However, this is at the expense of fairness: tax burden is moved onto a smaller portion of the population and lower-income families still don't end up with any more leverage to capture the social wealth that their labor is generating.

        I would regard a fair taxation scheme to be one where everyone pays for the services that they use. The load that each person and each piece of property makes on the state resources is probably pretty consistent, so a low marginal tax rate will probably be more fair than a progressive tax system with a higher marginal rate. Fairness is important to avoid creating a economic distortion that discourages entrepreneurship and creates incentive to "game the system" (leaving the state or disguising income). On the other hand, becoming less progressive would have a negative overall social outcome, since a lot of people cannot currently afford to pay "their fair share" in this sense.

        We can try to keep both the fairness of a non-progressive income tax and also the social benefit of increasing the wealth of low-income families by taking other measures to increase their wealth. If someone works diligently and still cannot afford to pay rent, tax, food and heating, then he or she is not being paid fairly for their work (or else we have unrealistic expectations for quality of life for Massachusetts residents). Strengthening unions, increasing the minimum wage, preferring economically depressed areas for new public assets (trains, universities, government offices) would all encourage increases in the wealth of lower-income people by giving them better leverage to capture the wealth that their labor is actually creating.

  9. Ripple effects?

    What do you all think the ripple effects would be?  I mean, other than the intended consequences of reducing the tax burden of low-income families.

    Would we reduce or reverse the drop in the working-age population of Mass.?

    Would we get more small-business activity?

    A higher savings rate?

    More demand on state colleges?

    Would we drive out the wealthier residents, and thus end up with less revenue than before?

    I would like to see more big picture thinking, instead of just wondering about how we could go about achieving this particular change.  The earlier comments about the interaction with federal income tax are a good start.

    • And also sorry not to reply to this earlier.

      I do think the intended consequences are important -- putting more money in the hands of families currently feeling the most financial stress.

      The ripple effects are hard to evaluate -- we can all spin the arguments about they would play out, but none of us can do it with confidence.  

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