Last week, the Massachusetts Department of Revenue announced that revenue benchmarks have been satisfied, allowing the state’s Part B income tax rate to decrease on Jan. 1, 2019 from its current level of 5.10 percent to 5.05 percent.
“A strong economy and careful management of the Commonwealth’s finances have created the conditions for Massachusetts taxpayers to get a much-deserved break,” Gov. Charlie Baker stated. “We are pleased that next year we will see taxpayers be able to keep more of their hard-earned money.”
A 2002 state law established the framework for reducing the Part B individual income tax rate when specific revenue thresholds are achieved. This law superseded an earlier tax-rate reduction plan that Massachusetts voters had approved through ballot initiative in November 2000.
“I was pleased to receive confirmation from the Department of Revenue that the revenue trigger had been met. This reflects steady revenue growth and a nice break for taxpayers,” Administration and Finance Secretary Michael J. Heffernan remarked.
Under the law’s provisions, whenever a tax year meets certain inflation-adjusted baseline revenue growth requirements, the income tax rate decreases by 0.05 percentage point increments until reaching 5 percent.
Part B income encompasses wages, salary, self-employment income, business and professional income, farm income, S corporation distributions, and rental income from personal property. This rate also applies to interest and dividends, as well as most long-term capital gains.
Five revenue tests govern whether a rate reduction occurs. The first measures revenue growth compared to the prior fiscal year, followed by four additional growth assessments. A rate reduction is blocked if any single test fails. The Department of Revenue’s recent certification shows that all five 2018 tests have been satisfied.
The most recent rate reduction took effect on Jan. 1, 2016, dropping the rate from 5.15% to 5.10%. Earlier reductions included:
- Jan. 1, 2012 (rate reduced from 5.3% to 5.25%)
- Jan. 1, 2014 (rate reduced from 5.25% to 5.2%)
- Jan. 1, 2015 (rate reduced from 5.2% to 5.15%)
The Fiscal 2019 state budget incorporated this income tax rate adjustment, which is expected to decrease tax revenue by approximately $84 million in Fiscal Year 2019 and approximately $175 million in Fiscal Year 2020.
Should 2019 revenues prove sufficient to trigger an additional rate reduction, the Part B income tax rate will fall to 5% for the 2020 tax year.