Executive Office for Administration and Finance

State HouseRooms 373 & 272

Boston, MA 02133

Tax Reform

January 2013

Administration & Finance

Administration and Finance

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Our GoalsIn 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

Administration and Finance

3*Personal exemption for Single/Head of Household/Joint filers.

Tax Revenue ProposalStatus Quo New Rates Policy Changes Revenue

Personal Income

5.25%$4,400/$6,800/$8,800*

6.25%$8,800/$13,600/$17,600*

Increase rate to 6.25% (lower rate for short term capital gains to 6.25%)

$2.57B $2.81B

Increase personal exemption 2x ($1.09B)

Eliminate 45 tax expenditures $1.33B

Sales 6.25% 4.50% Lower rate to 4.50% ($1.37B) ($1.10B)Tax custom modifications to canned software and related computer services

$265M

Corporate Income

8.00% 8.00% Eliminate FAS 109 deduction $76M $194MEliminate special classifications for security and utility corporations

$83M

Implement sales factor sourcing for services $35M

Total $1.90B

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Impact to People

$-

$5,000

$10,000

$15,000

$20,000

$25,000

400 1000 19003500

13900

500700

1000

1400

2300

$300 $1,100 $2,300

$4,300

$17,600

$400 $500

$800

$1,000

$1,700

Average Tax by Income Quintile

Avg. Income Tax Avg. Sales Tax

Status Quo New Policy0-20% <$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 fileincome taxes. Excludes capital gains.

Effective tax rates (sales and personal income)

Income QuintileNet Adjusted Gross

Income

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Allocation of New Tax Revenue: FY14-FY18 and FY23

Uses of New Tax Revenue by Fiscal Year ($Ms- Before Inflation)FY14 FY15 FY16 FY17 FY18 FY23

New Revenue 779 1,900 1,900 1,900 1,900 1,900

InvestmentsTransportation 231 600 700 755 755 755 Education 912 975 975 1,020 1,020 1,020 Innovation 36 50 100 125 125 125 Total New Spending 1,179 1,625 1,775 1,900 1,900 1,900

(Issue)/Repay Revenue Note 400 (275) (125)

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Transportation Need for New Tax RevenueFY14-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 FY15 FY16 FY17 FY18 FY23$231M* $600M $700M $755M $755M $755M

*FY14 allocation reflects items that can be implemented immediately and the launch of the capital program.

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Transportation Need: Solutions from Current Tools(Not Including Gas Tax)

Solutions ($Ms) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23MBTA Fares - 27 27 57 57 89 90 124 125 162 RMV Fees - - 55 56 57 58 60 128 131 134 Tolls - 17 17 35 36 55 56 77 78 101 Western Turnpike AET Savings - - 50 51 53 54 55 57 58 59 MassPort Other Contributions - 10 10 11 11 11 11 12 12 12 Gaming 25 12 - 50 51 53 54 55 57 58 Convention Center - - - 10 10 11 11 11 11 12

Total 25 66 159 270 275 330 336 463 472 538

NotesMBTA Fares 5% biennial fare increase beginning in FY15. Increases fare revenue 27% over baseline by FY23.RMV Fees 10% fee increase every five years beginning in FY16. Increases fee revenue 20% over baseline by FY23.Tolls 5% biennial fare increase beginning in FY15. Increases fare revenue 27% over baseline by FY23.Western Turnpike AET Savings Preliminary estimate.MassPort Other Contributions Preliminary estimate.Gaming One-time available in FY14 (2/3rds). Recurring amount available in FY17.Convention Center Preliminary estimate.

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Fiscal Year Motor Fuels Tax

Motor Fuels Tax

Collections ($Ms)

Motor Fuels Tax

Motor Fuels Tax

Collections ($Ms)

New Revenue

($Ms)FY14 0.2100$ 664$ 0.2142$ 677$ 13$ FY15 0.2100$ 660$ 0.2185$ 686$ 27$ FY16 0.2100$ 661$ 0.2229$ 702$ 40$ FY17 0.2100$ 669$ 0.2273$ 724$ 55$ FY18 0.2100$ 674$ 0.2319$ 744$ 70$ FY19 0.2100$ 677$ 0.2365$ 763$ 85$ FY20 0.2100$ 681$ 0.2412$ 782$ 101$ FY21 0.2100$ 685$ 0.2460$ 802$ 118$

Current Policy New Policy (Index to Inflation)

Transportation Need: Solutions from Indexing Gas Tax

Note: Analysis assumes 2% annual inflation.

• Indexing the gas tax to inflation, beginning in FY14, would generate $118M in additional revenue by FY21.

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California

Washington

Rhode Island

Pennsylva

nia

OregonOhio

Nebraska

Vermont

New YorkUtah

South Dakota

Maryland

North Dako

taIowa

Tennessee

GeorgiaIlli

nois

New Hampshire

Arizona

Federal

Indiana

Virginia

Hawaii

South Carolina

New Jerse

yAlaska

0

10

20

30

40

50

60

Total Gasoline Tax (Cents per Gallon)60 c/gal

47 c/gal

Gas Tax

Data source: Federation of Tax Administrators.

Fully funding the transportation investment would require increasing the gas tax to 60 cents per gallon (47 cents after solutions from current tools).

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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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FY14 FY15 FY16 FY17 FY18 FY23 -

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Allocation of Sales Tax

Cent

s on

the

Dolla

r

Sales Tax Dedicated Entirely to Transportation and Infrastructure

Transportation ranges from 1.02 to 1.32 cents for FY15-FY23 (2.14 to 2.44 cents including the MBTA).

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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).

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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).

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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

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Personal Income Tax Expenditures: Proposed for EliminationTE Budget Code Tax Expenditure Revenue Source Beneficiaries

1.001 Exemption of Premiums on Accident and Accidental Death Insurance $ 24 I.R.C. 1,970,000 1.002 Exemption of Premiums on Group-Term Life Insurance $ 12 I.R.C. - 1.003 Life insurance interest $ 211 I.R.C. - 1.010 Exemption of Workers' Compensation Benefits $ 8 I.R.C. - 1.011 Exemption of Dependent Care Expenses $ 9 I.R.C. - 1.012 Exemption of Certain Foster Care Payments $ 3 I.R.C. - 1.013 Exemption of Payments Made to Coal Miners $ - I.R.C. - 1.014 Exemption of Rental Value of Parsonages $ 2 I.R.C. - 1.015 Exemption of Scholarships and Fellowships $ 19 I.R.C. 255,000 1.016 Exclusion of Certain Prizes and Awards $ - I.R.C. - 1.017 Exemption of Cost-Sharing Payments $ - I.R.C. - 1.018 Exemption of Meals and Lodging Provided at Work $ 8 I.R.C. - 1.019 Treatment of Business-Related Entertainment Expenses $ - I.R.C. - 1.020 Exemption of Income from the Sale, Lease or Transfer of Certain Patents $ - M.G.L. - 1.021 Capital gains on home sales $ 240 I.R.C. 55,000 1.030 Parking, T-pass, and vanpool fringe benefits $ 39 I.R.C. - 1.031 Health Savings Accounts (exemption) $ - I.R.C. - 1.032 Employer-Provided Adoption Assistance $ - I.R.C. - 1.033 Employer-Provided Education Assistance $ 8 I.R.C. - 1.034 Qualified Retirement Planning Services $ - I.R.C. - 1.035 Department of Defense Homeowners Assistance Plan $ - I.R.C. - 1.039 Discharge of Indebtedness for Health Care Professionals $ - I.R.C. - 1.040 Archer Medical Savings Accounts (exemption) $ - I.R.C. - 1.201 Capital Gains Deduction $ - M.G.L. - 1.202 Deduction of Capital Losses against Interest and Dividend Income $ - M.G.L. - 1.312 Expensing of Certain Capital Outlays of Farmers $ 0 I.R.C. - 1.401 Deduction for Employee Contributions to Social Security and Railroad Retirement System $ 300 M.G.L. 3,585,000 1.402 Deduction for Employee Contributions to Public Pension Plans $ - M.G.L. - 1.405 Dependents Exemption where the Child Earns Income $ - I.R.C. / M.G.L. - 1.406 Deduction for dependents under 12 $ 136 M.G.L. 510,000 1.407 Personal Exemption for Students Aged 19 or Over $ 8 I.R.C. / M.G.L. - 1.408 Deduction for Adoption Fees $ 0 M.G.L. 1,000 1.409 Deduction for Business-Related Childcare Expenses $ 15 I.R.C. / M.G.L. 54,000 1.412 Nontaxation of Charitable Purpose Income of Trustees, Executors or Administrators $ - M.G.L. - 1.413 Exemption of Interest on Savings in Massachusetts Banks $ 5 M.G.L. 505,000 1.414 Tuition Tax Deduction $ 36 M.G.L. 65,000 1.415 Charitable Contributions Tax Deduction $ - M.G.L. - 1.418 Deduction for Costs Involved in Unlawful Discrimination Suits $ - I.R.C. - 1.420 Archer Medical Savings Accounts (deduction) $ - I.R.C. - 1.421 Clean-Fuel Vehicles and Certain Refueling Prop. $ - I.R.C. - 1.422 Health Savings Accounts (deduction) $ 12 I.R.C. 10,000 1.423 Commuter Deduction $ 7 M.G.L. 225,000 1.601 Renewable Energy Source Credit $ 1 M.G.L. 2,000 1.602 Credit for Removal of Lead Paint $ 3 M.G.L. 1,850 1.606 Septic System Repair Credit 13$ M.G.L. 11,000

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Personal Income Tax Expenditures: RetainedTE Budget Code Tax Expenditure Revenue Source Beneficiaries TE Budget Code Tax Expenditure Revenue Source Beneficiaries

Needs-Based Preempted by Federal Law1.404 Additional Exemption for the Blind $ 1 M.G.L. 10,000 1.103 Exempt of Earnings on Stock Bonus Plans or Profit Sharing Trusts $ - M.G.L. - 1.008 Public assistance benefits 230$ M.G.L. - 1.403 Elderly $ 26 M.G.L. 495,000 Mirrors Corporate Code1.609 Senior property tax circuit breaker $ 78 M.G.L. 82,000 1.203 Excess Natural Resource Depletion Allowance $ 0 I.R.C. -

1.204 Abandoned Building Renovation Deduction $ 4 M.G.L. - Supports Working Families 1.301 Accelerated Depreciation on Rental Housing $ 20 I.R.C. -

1.411 Rent deduction $ 116 M.G.L. 770,000 1.303 Accelerated Depreciation on Buildings (other than Rental Housing) $ 6 I.R.C. - 1.425 Student loan interest, undergrad interest deduction $ 29 M.G.L. 345,000 1.304 ACRS for Equipment $ 47 I.R.C. - 1.605 Earned income credit $ 132 M.G.L. 1.305 Deduction for Excess First-Year Depreciation $ 8 I.R.C. -

1.306 Five-Year Amortization of Start-Up Cost $ 5 I.R.C. - Retirement 1.308 Expensing of Exploration and Development Costs $ - I.R.C. -

1.005 Exemption of Annuity or Pension Payments to Firemen and Policemen $ - M.G.L. - 1.309 Expensing of Research and Development Expenditures in One Year $ 1 I.R.C. - 1.006 Pension and annuity distributions $ 280 M.G.L. - 1.310 Five-Year Amortization of Pollution Control Facilities $ - I.R.C. - 1.007 Exemption of Railroad Retirement Benefits $ 5 M.G.L. - 1.311 Seven Year Amortization for Reforestation $ - I.R.C. - 1.009 Social Security benefits $ 839 M.G.L. 1,200,000 1.610 Historic Buildings Rehabilitation Credit 3$ M.G.L. 80 1.101 Employer contributions to private pension plans $ 959 I.R.C. - 1.611 Film Credit, Payroll and Production 3$ M.G.L. 50 1.104 Exemption of earnings on IRA and Keogh plans $ 326 M.G.L. - 1.613 Medical Device Credit 0$ M.G.L. 30

1.614 Dairy Farmer Tax Credit 0$ M.G.L. 200 Health 1.615 Conservation Land Tax Credit 2$ M.G.L. -

1.004 Employer contributions to health insurance $ 943 I.R.C. 1,200,000 1.607 Low Income Housing Tax Credit 2$ M.G.L. 220 1.424 Self-employed health insurance $ 44 I.R.C. 95,000 1.608 Brownfields Credit 3$ M.G.L. 60 1.410 Medical expenses $ 78 I.R.C. / M.G.L. 185,000 1.603 EDIP/Economic Opportunity Area Credit 3$ M.G.L. 280 1.426 Expenses of Human Organ Transplant $ 1 M.G.L. - 1.604 Credit for Employing Former Full-Employment Program Participants -$ M.G.L. 250

Public Safety and Armed Services Other1.028 Exemption of Income Received by Persons Killed in Military Action or Terrorist Activity $ - M.G.L. - 1.022 Nontaxation of capital gains at death $ 1,217 I.R.C. - 1.036 Survivor Annuities of Fallen Public Safety Offi cers $ - I.R.C. - 1.023 Interest from Massachusetts obligations $ 99 M.G.L. - 1.037 Survivor Annuities of Fallen Astronauts $ - I.R.C. - 1.102 Treatment of Incentive Stock Options $ - I.R.C. - 1.038 Discharge of Indebtedness for Victims of Terrorism $ - I.R.C. - 1.106 Nontaxation of capital gains at the time of gift $ 124 I.R.C. - 1.419 Business Exp of National Guard and Reserve Members $ - I.R.C. - 1.024 Exemption of benefits and allowances to armed forces personnel $ 24 I.R.C. - 1.025 Exemption of veterans' pensions, disability compensation, and G.I. benefits $ 30 I.R.C. 365,000 1.026 Exemption of military disability pensions $ 1 I.R.C. - 1.027 Exemption of Compensation to Massachusetts-Based Nonresident Military Personnel $ 9 M.G.L. 3,200 1.029 Exemption for retirement pay of the uniformed services $ 26 M.G.L. 19,000

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Corporate Tax Breaks

• 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

Tax Break Annual RevenueFAS 109 76$ Security and Utility Corp. Classifications 83$ Sales Factor Sourcing for Services 35$ Custom modifications to software and other computer services 265$