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Local Aid and Finance Tax repeal would trigger fiscal crisis
Voter approval this fall of a state ballot proposal to repeal the state income tax would push the state into a deep fiscal crisis and could result in local aid cuts of more than $3 billion, dramatically increasing reliance on the property tax, according to an analysis by the MMA.
Question 1 would reduce the income tax rate from 5.3 percent to 2.65 percent on Jan. 1, 2009 (midway through fiscal 2009), and eliminate the income tax altogether beginning in January 2010, ultimately reducing state revenue by 40 percent, or nearly $13 billion per year.
The loss of such a significant revenue source could result in local aid cuts of $2.5 billion, or about 40 percent, according to an MMA simulation of the impact of Question 1. An additional half a billion dollars could be lost due to cuts to state-sponsored capital programs, such as school building assistance, Chapter 90 local road construction, library construction, and water and sewer assistance.
While it is impossible to predict with certainty how the governor and the Legislature might impose spending cuts to offset the loss of revenue, the MMA simulation is based on a series of straight-forward assumptions, worked out with state officials, about how extraordinary cuts might be allocated in light of legal obligations that the state cannot readily avoid and a need to make cuts in a way that doesn’t worsen the state revenue situation.
The simulation assumes that spending cuts would be allocated across the board to all accounts unless there is a compelling legal or revenue reason for different treatment. The simulation does not try to anticipate future decisions about the relative policy importance of state budget items, or what a revisited fiscal 2009 budget or the fiscal 2010 budget might look like.
The basic assumptions are that the state would continue to meet its debt service obligations, but would issue little or no new debt for new capital spending at the state and local levels. Debt-related spending would be cut by about a quarter.
State funding for Medicaid and Transitional Aid to Families With Dependent Children would be reduced to the minimum amount necessary to maintain any federal revenue contributions. Cuts to these programs would total about $3.4 billion.
Pension funding would be reduced by more than $1 billion as the state is forced to abandon its reform-inspired funding schedule and move to a “pay as you go” system.
Cuts in the Chapter 70 school aid program, intended to meet the state’s constitutional obligations to ensure minimum school funding, would be limited to about $1.1 billion statewide (27 percent), although many districts would lose all school aid.
After making the basic assumptions, all other accounts would be subject to an “across the board” cut of about 63 percent, according to the MMA simulation. This includes two main municipal aid accounts – Additional Assistance and Lottery distributions – which together would be cut by $822 million.
Similar cuts would also be imposed on reimbursements for property tax exemptions, veterans benefits, the police incentive pay program, library aid, payments in lieu of taxes, and other municipal programs.
On the school side, the simulation indicates across-the-board cuts in school transportation, the special education “circuit breaker” program, reimbursements for charter school-related losses (though funding for charter schools themselves would be unaffected), and a wide array of school grant programs.
State contributions to municipal and school capital projects would also be sharply curtailed or eliminated, at least in the near term, as a moratorium on new state bond authorizations would be expected.
The simulation projects a halt to the $150 million annual Chapter 90 road construction program and to funding of new school projects by the Massachusetts School Building Authority.
Cities and towns, already depending heavily on property tax revenues and fees to pay for municipal and school services, would find reliance on local revenues climbing quickly as excess capacity is tapped and overrides and exclusions are used to offset at least some of the local aid losses.
• Link to Vote No on Question 1 Web site
• Full text of initiative petition to end the income tax (144K PDF)
Summary of Question 1, from the Attorney General’s Office
This proposed law would reduce the state personal income tax rate to 2.65 percent for all categories of taxable income for the tax year beginning on or after Jan. 1, 2009, and would eliminate the tax for all tax years beginning on or after Jan. 1, 2010.
The personal income tax applies to income received or gain realized by individuals and married couples, by estates of deceased persons, by certain trustees and other fiduciaries, by persons who are partners in and receive income from partnerships, by corporate trusts, and by persons who receive income as shareholders of “S corporations” as defined under federal tax law. The proposed law would not affect the tax due on income or gain realized in a tax year beginning before Jan. 1, 2009.
The proposed law states that if any of its parts were declared invalid, the other parts would stay in effect.
Local Aid and Finance Tax repeal would trigger fiscal crisis
Tax repeal would trigger fiscal crisis
Voter approval this fall of a state ballot proposal to repeal the state income tax would push the state into a deep fiscal crisis and could result in local aid cuts of more than $3 billion, dramatically increasing reliance on the property tax, according to an analysis by the MMA.
Question 1 would reduce the income tax rate from 5.3 percent to 2.65 percent on Jan. 1, 2009 (midway through fiscal 2009), and eliminate the income tax altogether beginning in January 2010, ultimately reducing state revenue by 40 percent, or nearly $13 billion per year.
The loss of such a significant revenue source could result in local aid cuts of $2.5 billion, or about 40 percent, according to an MMA simulation of the impact of Question 1. An additional half a billion dollars could be lost due to cuts to state-sponsored capital programs, such as school building assistance, Chapter 90 local road construction, library construction, and water and sewer assistance.
While it is impossible to predict with certainty how the governor and the Legislature might impose spending cuts to offset the loss of revenue, the MMA simulation is based on a series of straight-forward assumptions, worked out with state officials, about how extraordinary cuts might be allocated in light of legal obligations that the state cannot readily avoid and a need to make cuts in a way that doesn’t worsen the state revenue situation.
The simulation assumes that spending cuts would be allocated across the board to all accounts unless there is a compelling legal or revenue reason for different treatment. The simulation does not try to anticipate future decisions about the relative policy importance of state budget items, or what a revisited fiscal 2009 budget or the fiscal 2010 budget might look like.
The basic assumptions are that the state would continue to meet its debt service obligations, but would issue little or no new debt for new capital spending at the state and local levels. Debt-related spending would be cut by about a quarter.
State funding for Medicaid and Transitional Aid to Families With Dependent Children would be reduced to the minimum amount necessary to maintain any federal revenue contributions. Cuts to these programs would total about $3.4 billion.
Pension funding would be reduced by more than $1 billion as the state is forced to abandon its reform-inspired funding schedule and move to a “pay as you go” system.
Cuts in the Chapter 70 school aid program, intended to meet the state’s constitutional obligations to ensure minimum school funding, would be limited to about $1.1 billion statewide (27 percent), although many districts would lose all school aid.
After making the basic assumptions, all other accounts would be subject to an “across the board” cut of about 63 percent, according to the MMA simulation. This includes two main municipal aid accounts – Additional Assistance and Lottery distributions – which together would be cut by $822 million.
Similar cuts would also be imposed on reimbursements for property tax exemptions, veterans benefits, the police incentive pay program, library aid, payments in lieu of taxes, and other municipal programs.
On the school side, the simulation indicates across-the-board cuts in school transportation, the special education “circuit breaker” program, reimbursements for charter school-related losses (though funding for charter schools themselves would be unaffected), and a wide array of school grant programs.
State contributions to municipal and school capital projects would also be sharply curtailed or eliminated, at least in the near term, as a moratorium on new state bond authorizations would be expected.
The simulation projects a halt to the $150 million annual Chapter 90 road construction program and to funding of new school projects by the Massachusetts School Building Authority.
Cities and towns, already depending heavily on property tax revenues and fees to pay for municipal and school services, would find reliance on local revenues climbing quickly as excess capacity is tapped and overrides and exclusions are used to offset at least some of the local aid losses.
• Link to Vote No on Question 1 Web site
• Full text of initiative petition to end the income tax (144K PDF)
Summary of Question 1, from the Attorney General’s Office
This proposed law would reduce the state personal income tax rate to 2.65 percent for all categories of taxable income for the tax year beginning on or after Jan. 1, 2009, and would eliminate the tax for all tax years beginning on or after Jan. 1, 2010.
The personal income tax applies to income received or gain realized by individuals and married couples, by estates of deceased persons, by certain trustees and other fiduciaries, by persons who are partners in and receive income from partnerships, by corporate trusts, and by persons who receive income as shareholders of “S corporations” as defined under federal tax law. The proposed law would not affect the tax due on income or gain realized in a tax year beginning before Jan. 1, 2009.
The proposed law states that if any of its parts were declared invalid, the other parts would stay in effect.
Written by MMA Legislative Director John Robertson
