Transcript Executive Office for Administration and Finance Tax Reform January 2013 Administration & Finance State House Rooms 373 & 272 Boston, MA 02133

Executive Office for
Administration and Finance
Tax Reform
January 2013
Administration & Finance
State House
Rooms 373 & 272
Boston, MA 02133
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
2
Administration and Finance
Tax Revenue Proposal
Personal
Income
Sales
Corporate
Income
Status Quo
New Rates
Policy Changes
Revenue
5.25%
6.25%
$2.57B
$4,400/
$6,800/
$8,800*
$8,800/
$13,600/
$17,600*
Increase rate to 6.25% (lower rate for short
term capital gains to 6.25%)
Increase personal exemption 2x
($1.09B)
Eliminate 45 tax expenditures
$1.33B
Lower rate to 4.50%
($1.37B)
Tax custom modifications to canned software
and related computer services
$265M
Eliminate FAS 109 deduction
$76M
Eliminate special classifications for security
and utility corporations
$83M
Implement sales factor sourcing for services
$35M
6.25%
8.00%
4.50%
8.00%
Total
$2.81B
($1.10B)
$194M
$1.90B
*Personal exemption for Single/Head of Household/Joint filers.
3
Administration and Finance
Impact to People
Average Tax by Income Quintile
$25,000
Avg. Income Tax
Avg. Sales Tax
Effective tax rates (sales and
personal income)
$20,000
$1,700
$15,000
$2,300
$10,000
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.
$17,600
$13,900
$5,000
$1,000
$1,400
$1,000$800
$-
$500 $400
$400 $300
$700 $500
$1,000$1,100
$1,900$2,300
$4,300
$3,500
4
Administration and Finance
Allocation of New Tax Revenue: FY14-FY18 and FY23
Uses of New Tax Revenue by Fiscal Year ($Ms- Before Inflation)
FY14
New Revenue
779
FY15
1,900
FY16
1,900
FY17
1,900
FY18
1,900
FY23
1,900
Investments
Transportation
Education
Innovation
Total New Spending
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
231
912
36
1,179
400
(275)
(125)
5
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
$231M*
FY15
$600M
FY16
$700M
FY17
$755M
FY18
$755M
FY23
$755M
*FY14 allocation reflects items that can be implemented immediately and the launch of the capital program.
6
Administration and Finance
Transportation Need: Solutions from Current Tools
(Not Including Gas Tax)
Solutions ($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.
7
Administration and Finance
Transportation Need: Solutions from Indexing Gas Tax
Fiscal Year
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
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
• 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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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
Gas Tax
Fully funding the transportation investment would require increasing the gas tax to
60 cents per gallon (47 cents after solutions from current tools).
60 c/gal
50
Data source: Federation of Tax Administrators.
Total Gasoline Tax (Cents per Gallon)
60
47 c/gal
40
30
20
10
0
9
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
-
FY14
FY15
FY16
FY17
FY18
FY23
Other Infrastructure
2.15
1.69
1.57
1.50
1.50
1.50
Transportation Gap
0.23
0.69
0.81
0.88
0.88
0.88
MBTA
1.12
1.12
1.12
1.12
1.12
1.12
MSBA
1.00
1.00
1.00
1.00
1.00
1.00
Transportation
ranges from
1.02 to 1.32
cents for FY15FY23 (2.14 to
2.44 cents
including the
MBTA).
11
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).
12
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).
13
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
14
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
15
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
Revenue
Source
$
$
$
$
1
230
26
78
Supports Working Families
1.411 Rent deduction
1.425 Student loan interest, undergrad interest deduction
1.605 Earned income credit
$
$
$
116
29
132
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
$
$
$
$
$
$
280
5
839
959
326
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
$
$
$
$
943
44
78
1
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
$
$
$
$
$
$
$
$
$
$
24
30
1
9
26
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
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
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
Beneficiaries
$
- M.G.L.
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
$
$
$
$
1,217
99
124
I.R.C.
M.G.L.
I.R.C.
I.R.C.
-
16
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
17