January 17, 2013

Patrick Proposes Hiking Income Tax, Cutting Sales Tax

Eric Haynes / Governor's Office
Gov. Deval Patrick delivers his State of the Commonwealth address in the House Chambers at the State House. In his speech, Patrick laid out plans for increasing the income tax and decreasing the sales tax to fund education and transportation efforts.

Gov. Deval Patrick rolled out an ambitious spending plan Wednesday night as he turned the corner on his second term in office, making the case to the public and lawmakers for a massive $1.9 billion tax increase that he said would be spent on education and transportation to "accelerate" economic growth.

While House and Senate Democrats took a mostly wait-and-see approach to Patrick's plan, Republicans and some business groups blasted the governor's call to increase the income tax as House Minority Leader Brad Jones called it the "Deval Patrick legacy project."

Despite the slow state of the economic recovery in Massachusetts, Patrick said investing in roads and rail projects and extending early education and care to all 30,000 infants, toddlers and pre-schoolers currently on wait lists would pay dividends down the line.

"I would not ask if I did not believe in my heart that investing meaningfully today in education and transportation will significantly improve our economic tomorrows," Patrick said.

While the governor's tax plan – which includes an income tax hike to 6.25 percent, and a decrease in the sales tax to 4.5 percent – faces an uncertain fate in the legislature, the governor chose to go big as the last legislative session of his tenure begins. The fact that the outcome of the debate could go a long way in determining his legacy after he leaves office was also not lost on Patrick, who suggested he has begun to think about, "What will last?" after six years as governor.

"I submit to you that if we act in this bold way, if we recommit to support our schools and our highways and byways, and do it for every corner of the our commonwealth, not only will we have done something meaningful for today, but we will have affirmed our commitment to opportunity itself," Patrick said.

Lawmakers, however, reacted warily to Patrick's proposal that would hike the income tax rate from its current level of 5.25 percent to 6.25 percent, a 19 percent increase that would net the state an additional $2.8 billion in annual revenue. The increase would bring the income tax to a 22-year high not seen since 1991, when residents also paid 6.25 percent.

To offset some of the burden placed on residents by the increase, Patrick will ask that the sales tax be reduced from 6.25 percent to 4.5 percent, a 28-percent reduction, and for personal income tax exemptions to be doubled. Sales tax revenue, under the governor's plan, would be dedicated to a public works fund to support transportation projects, the school building fund and other public infrastructure. House Speaker Robert DeLeo and Senate President Therese Murray both said they are open to the governor's proposal, and that it should receive a full airing.

Murray said she would have a better idea of how Senate Democrats feel about the proposal, and the level of appetite for new taxes, after she discusses it with the caucus. "We haven't even had this for 15 minutes," Murray said, noting that she had not been briefed by the governor beforehand. Murray said, "Maybe we'll meet him somewhere down the road, but we don't know yet."

The last time the income rate jumped a single percentage point in one year was in 1972 when in it went from 4 to 5 percent, according to Department of Revenue data. From 1988 to 1991, the income tax rate climbed from 5 percent to 6.25 percent, before dropping down to 5.95 percent in 1992.

Senate Minority Leader Bruce Tarr said creating more jobs would generate more income tax revenue without raising rates. "We talked a lot about investment of public dollars, but what about trying to stimulate the economy by trying to leave more disposable income in the hands of the people who are going to spend it and invest it rather than taking it and cycling it through state government," Tarr said.

Tarr said he has never signed an anti-tax pledge, but could not justify the level of spending Patrick was proposing.

Transportation Secretary Richard Davey said that if the proposal succeeds, the MBTA will be able to start operating an hour later on the weekends, and the state would be able to move highways workers' salaries off the capital budget to the operating budget so their wages would no longer be paid with borrowed money.

Responding to the assertion that an income tax hike won't be popular, Davey said, "Nope, but neither does traffic, potholes, broken down roads, bridges, cars, etc. We've got to find a way to fund it."

The transportation system's share of the proposed 4.5 percent sales tax would be enough to "fund the program we've outlined" with some additional revenues, including "modest increases in fares at the T, probably every two years, about 5 percent," Davey said.

Sen. Jamie Eldridge, D-Acton, who has advocated for hiking the income tax to 5.95 percent, was unequivocally behind the governor's proposal.

"I'm in full support of Governor's proposal," Eldridge wrote on Twitter after the speech.

According to the administration, the governor's blend of an income tax increase with a sales tax decrease would actually save individuals in the lowest two income quintiles $100 to $200 a year, while the top 20 percent of income earners would bear the brunt of the burden with a $3,200 increase in their annual tax burden.

Massachusetts currently ranks 27th among states for state and local taxes as a percent of personal income. The governor's plan would vault the state up nine spots to 18th, just higher than the national average, but the middle of the pack when compared to what the administration considers "comparison states" like Connecticut, New Jersey and North Carolina.

The reduction in the sales tax would give Massachusetts the 35th highest sales tax rate in the country, down from the 13th highest.

Bill Vernon, state director for the National Federation of Independent Business (NFIB), said raising taxes to the tune of $2 billion would slow the economic recovery and make it more difficult for the 8,000 business owners represented by the NFIB to create jobs.

"Three quarters of all small businesses file their taxes as individuals," Vernon said in a statement. "It's just not a good time to raise income taxes on businesses that we want creating jobs and making investments in the state economy."

Vernon said if the governor wants to invest in his top priorities like education and transportation, he should reduce spending elsewhere in state government.

Jon Hurst, president of the Retailers Association of Massachusetts, said he would have to "run it up the flagpole" with his members, but was intrigued by the idea of cutting the sales tax by 28 percent, making Massachusetts more competitive with neighboring New Hampshire.

"It's bold. It's progressive. And arguably the model is a better tax model, certainly for small businesses," Hurst said.

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