A ballot initiative proposed for this November’s state election, targeted at cutting personal income tax rates, could drastically reduce the support Beacon Hill provides to cities and towns. If passed by voters, the initiative to cut the tax rate from 5% to 4% would leave lawmakers with fewer resources to keep the state out of the red.
And while it is still too early to predict the exact impact on Arlington if the question passes, Town Manager Jim Feeney said it is likely to be felt across all municipal services and upend the assumptions upon which the recently approved Proposition 2½ override was based.
The current 5% personal income tax generates roughly $25 billion annually, averaging around 40% of the state’s overall budget and is the largest single source of revenue, according to reports from the Department of Revenue.
But when coupled with cuts to federal aid by the Trump administration, Rep. Aaron Michlewitz, D-Boston, the top House budget writer, called the initiative “irresponsible” during a state revenue hearing.
Tax savings vs. local aid lost
The projection for the potential lost revenue due to this cut is unclear; the Massachusetts Department of Revenue said the state could lose between $4.2 billion and $4.8 billion in tax revenue. Adam Chapdelaine, executive director and CEO of the Massachusetts Municipal Association and former Arlington town manager, said that he has heard that the losses could spill over past $5 billion.
And The Boston Globe reported a rate cut could potentially affect a planned state charitable contribution deduction, as well as taxes paid by many small businesses.
The ballot initiative spearheaded by the non-profit Mass Opportunity Alliance aims to gradually decrease the tax rate to 4% by 2029, according to the policy document. By last winter, $1.6 million had been spent to support the initiative, according to WBUR.
Supporters of the policy believe the tax cut will address the affordability crisis in the state and spur the economy.
The group did not respond to requests for comment. But in previous interviews, Jim Stergios, a lead on the initiative and executive director of the Pioneer Institute, said criticism for the proposed cut inaccurately captures the benefits it will bring.
“Critics of the tax proposal are once again trotting out the same simplistic doomsday analysis they did when a proposal to cut the state income tax rate was last on the ballot in 2000,” said Stergios. “The evidence is clear: a one-percentage-point income tax cut implemented over three years did not cause a dramatic fall in revenues then, and it won’t now.”
In the past, when the state budget saw a significant reduction in revenues, like the Great Recession in 2008, local aid suffered dramatically, said Chapdelaine. The last successful ballot initiative to reduce state income tax, from 5.9% to 5%, passed in 2000 but was not fully phased in until 2020.
Largely because of national economic forces at play, like the dot-com recession, Massachusetts was hit harder than the country overall, according to the Massachusetts Taxpayers Foundation.
It is impossible to predict the change in behavior of taxpayers or larger economic trends, for example, if the tax does boost activity and earnings by 5%, it would reduce revenue loss by $1.1 billion, according to the MTF. However, if the reduction were to overlap with an economic slowdown, the negative impact on the budget would likely be exacerbated.
“The best case scenario is that the ballot question proponents are right, and the reduction will actually spur economic growth, and tax revenue won’t drop by as much as is projected,” said Chapdelaine. “I’ve not seen any economists actually predict that as being a potential reality.
“I think the worst-case scenario is we see a significant degradation of local services, which further upsets people in their trust in government, and just continues to sort of degrade the current climate that we’re all operating in.”
Local impact
While the rate cut would be phased in over three years, the question of “what next” for local communities is more immediate.
Towns across the state are struggling to afford day-to-day operations, and some communities, like Arlington, are turning to measures like a Proposition 2 1/2 override to finance municipal services. Seven other communities have approved an override so far this year, and since 2000, when the last rate cut was approved, overrides have become more prevalent, according to data maintained by DOR’s Division of Local Services.
However, the same data shows that 58% of overrides since the measure was established have failed, indicating the practice is not a reliable way to close budget gaps.
The recently passed $14.8 million override in Arlington sets up the town budget until fiscal year 2030; however, if this ballot initiative passes, meeting the policy commitments could become challenging, said Feeney.
“Looking ahead, Arlington would need to change its assumptions on state aid, which would likely raise the amount of money associated with future planned operating overrides aimed at avoiding service level and staffing reductions,” he said. “I wouldn’t see this impact being one of a targeted nature, but it would be spread across the organization, and it would touch upon all facets of public education and municipal services.”
The initiative has drawn criticism due to its skewed impact on the tax base. Many, like the Massachusetts Teachers Association, have made statements against the initiative, highlighting what it called insufficient benefit for most taxpayers compared to the cost to public funding.
According to the Massachusetts Budget and Policy Center, the proposed ballot question would disproportionally benefit the top one percent of households with a tax break. As 80% of households by income would see 1/30th of the benefit, as those at the top of the tax bracket.
Certain communities across the commonwealth could also be more susceptible to the adverse effects of revenue loss.
Gateway and urban communities more reliant on state aid would experience a greater loss to their budget. As communities across the state pursue avenues like overrides to fund operations, this would put more pressure on local taxpayers, said Chapdelaine.
“I want to be careful, not to dismiss the reality that everybody in Massachusetts, probably in the whole country, is facing an affordability crisis and how people are feeling in their household checkbooks and pocketbooks,” said Chapdelaine.
“But if you compare that up against what’s at risk in terms of local services, state government services, and also the possibility of how much your property taxes would have to go up to make up for the income tax loss. I think what we see is a ballot question that sounds really good, but in all reality, is going to benefit the people at the high, high end of the income bracket.”
Ballot initiatives
While two other ballot questions aimed to reduce income tax in 2002 and 2008 failed, a February poll of 670 respondents by the University of New Hampshire reported that 58% of residents supported the ballot initiative.
Beacon Hill lawmakers have made their concerns with the tax cut proposal clear.
“Referendum questions are not the way to bluntly change tax code, and so I’m absolutely opposed to the reduction in the income tax,” Senate budget chief Michael Rodrigues, D-Westport, said in a December hearing.
House Speaker Ron Mariano has urged policy proponents to sit down with lawmakers, saying the House is open and willing to work on alternative solutions to address affordability and competitiveness in a “fiscally responsible manner.”
Mariano expressed concern for the future if voters approve the question in November, and highlighted many potential sectors or services that could face reductions if the tax cut is passed.
Gov. Maura Healey has also expressed her opposition.
“It doesn’t make sense for residents, it doesn’t make things more affordable, and it actually hurts business interests because you’re not going to see the investments that we’ve been able to make,” said Healey. “I really want the public to understand how catastrophic this would be to Massachusetts.”
Opponents have also challenged whether the question should even remain on the ballot, charging that the summary prepared by Attorney General Andrea Campbell did not accurately reflect the true impact. The Supreme Judicial Court scheduled a hearing for May 4 with a decision likely within 130 days.