Baker unveiled a sweeping tax cut proposal at the Massachusetts Chamber of Commerce breakfast on Friday June 10th, reducing corporate sales and income taxes all to 5%.
Corporate Tax Rate at 5%: The proposal is fairly comprehensive, but it would have the effect of greatly simplifying the corporate tax code. The current corporate tax code is complex and taxes businesses in different industries differently with a tax rate in most industries at 8.75%. Baker proposes to reduce the corporate tax rate on all industries to 5% within 4 years.
Sales Tax at 5%: Baker would reduce the sales tax from 6.25% to 5%. Massachusetts sales tax is higher than the sales tax of 40 other states, and is slightly higher than most neighboring states ( NH: 0%, NY: 4%, ME: 5%, CT: 6%, VT: 6%, RI: 7% ) A 5% sales tax would make Massachusetts sales tax lower than many of our neighbors and bring business into Massachusetts. It would not nullify New Hampshire’s 0% advantage, but would put us much closer to New York’s 4% rate, benefiting western Massachusetts. Besides, a high sales tax is essentially a regressive tax that hits the poor and unemployed the hardest.
Income Tax at 5%: There was a ballot initiative last year to roll back the Massachusetts income tax to 5%, from its current 5.25%. At the time opponents of the tax reduction argued successfully that a tax reduction would result in greater budget cuts and possibly another cut to local aid with the resulting teacher layoffs. But even with the income tax at 5.25%, the Legislature is almost certain to cut local aid again this year, even as it continues to increase budgets at patronage laden state agencies. Given that the Legislature has not managed to control costs, or preserve the budget for critical local school and police departments, voters may be in a mood now to force some fiscal discipline.
Balancing the State Budget
Tax cuts are of course always popular, but when tax cuts are proposed the question is always how will the state balance the budget with reduced revenue. The state is already facing a likely budget deficit next year of at least $2 billion. These tax cuts would reduce revenue by an estimated $175 million.
Baker argues that these tax cuts are necessary to pull the Massachusetts economy out of recession. He outlines his reasons why the tax cuts are necessary in an editorial in the Lowell Sun:
- More than 320,000 Massachusetts residents remain out of work.
- He doesn’t think Massachusetts is yet recovering from the recession.
- Massachusetts is ranked 46th out of 50 states as a good place to do business.
Deval Patrick asserts that the economy is â€œon the mend and on the move.â€ Recent economic reports have been positive. If that trend reverses, as is likely, Patrick’s sunny prognostications could come back to haunt him later in the Fall.
Patrick has also criticized the plan as being too expensive, saying that it would actually result in $2 billion in reduced state revenue, and calling on Baker to outline how he would balance the budget:
“(Baker’s proposals) all sound good on their surface, but that’s $2 billion of services that have to be cut, and until we start having a serious conversation about what those are, these proposals can’t be taken very seriously.”
Baker has made 13 specific cost cutting proposals, his “Baker’s Dozen“, that he says would save the state $1 billion per year. With some political courage and leadership he can probably find those savings since there is massive waste and abuse in our ever expanding state budget. (e.g. the probation patronage scandal, state pension reform, gic health care for municipal workers, the Boston Fire Department union contract etc. )
Among his proposals, Baker has called for reforming the public employee pension system, curbing health care cost growth and allowing cities and towns to join the state’s GIC insurance pool, all of which take some political courage.
For every abuse in the state budget there is a political constituency behind it. Actually, enacting these reforms will be much more difficult. A governor can only propose a budget and spending reforms – only a legislature can act on them. Unless voters replace a large number of legislators, it’s not likely any governor will able to implement significant budget reforms.
Baker’s entire tax relief proposal follows (via MassBeacon):
Getting Massachusetts Back in Business
1. Establish a simple and equitable tax system to send a strong message to the business community that Massachusetts is a business-friendly state
- Adopt a statutory tax rate of 5 percent for all business entities.Â Massachusetts has a complicated system that sets forth a series of tax rates depending on the type of business entity, the industry the company represents and the size of the company.Â An across the board uniform state rate for all business classifications is the simplest form of taxation.
- Phase out ancillary taxes.Â This includes the $456 minimum tax on S and C corporations, the sting tax on S corporations, and the tangible property tax on C corporations.
To accomplish the above, the state must phase down the corporate tax rate and ancillary taxes over four years.
Year one â€“ 8%; Year two â€“ 7%; Year three â€“ 6%; Year four â€“ 5%
- Reduce the filing fees.Â Annual filing fees range from $125 for C and S corporations to $500 for LLCs and LLPs.Â There should be one equitable and reasonable fee of $125 for business entities.
2. Make Massachusettsâ€™ tax policies competitive with other states so that jobs are created here.
- Reduce the stateâ€™s sales tax to 5 percent.Â Right now, Massachusetts is competing with states like New Hampshire with no sales tax and 40 other states in the country with a sales tax rate of less than 6.25 percent.
- Reduce the stateâ€™s income tax rate to 5 percent.Â Many of the stateâ€™s small businesses, such as sole proprietorships, S corporations, limited liability companies and limited liability partnerships, pay the stateâ€™s income tax.Â There are 600,000 small businesses in the Bay State â€“ a reduction in the income tax rate could be the difference in helping them afford to a new employee.
- Enact a true waterâ€™s edge provision in the combined reporting law.Â Massachusetts has set up a taxation system that tries to apportion business profits made from world-wide operations which are already taxed in the country where the businesses are located.Â Massachusetts risks foreign investment, key to its recovery, by its failure to act to enact true waterâ€™s edge provision.
- Reform the unemployment insurance program.Â Unemployment Insurance is one of many areas in which Massachusetts employers struggle with some of the highest costs in the nation.Â The state must reform the UI program, without cutting benefits, by:
1.)Â Â Â Charge employers with a stable workforce history lower UI rates while charging employers who frequently layoff staff higher rates.
2.)Â Â Â Require workers to work longer, and to earn their compensation over two quarters in order to be eligible to collect.
3.)Â Â Â Charge new employers a UI rate that reflects their actual rate rather than a rate that is artificially low â€“ this results in significant increases in UI rates once the new employer rate period is over (12 months).
4.)Â Â Â Compute payroll tax for UI purposes on a three to five year average payroll rather than a 12 month average.Â MA is one of only 3 states to use the 12 month average; all other states have a longer look back period.
3. Provide businesses with a predictable set of rules on how to conduct business in Massachusetts
- Immediate moratoriumÂ on regulations.Â On day one, impose an immediate moratorium on all new regulations and amendments and launch a full competitive regulatory reform initiative to be completed within one year.
- Eliminate anti-competitive policies.Â Perform a top-to-bottom review and rescind or modify regulations that place undue burden on Massachusetts citizens and stifle competition in the business community.
- Make it Business Friendly.Â Establish a licensing and regulatory review board with representatives of the business community, trade/professional organizations, and other key regulated parties.Â No regulation, license, permit, or certification will be created or amended without this boardâ€™s review.
- Stop the madness.Â Veto any bill that is overly burdensome, anti-competitive, or excessively restrictive for businesses.
4. Adopt a reasonable and effective statewide energy policy
- Support Hydro Quebec as a renewable energy source.Â Hydro Quebec has significant potential to provide Massachusetts with clean, renewable power that will expand the stateâ€™s energy portfolio while reducing the cost of electricity for ratepayers.Â The state should support the efforts to bring this power to Massachusetts and qualify it as a renewable energy source.
- Focus on energy efficiency.Â The state should continue to invest in energy efficiency.Â Given that only a limited amount of electricity can be generated within Massachusetts, the state should focus more heavily on energy efficiency as a way to lower energy costs.
1)Â Â Â Â Â Â Â Waive sales tax on energy efficiency appliances and upgrades.Â This will encourage homeowners and businesses to purchase energy efficient appliances and technologies such as appliances, windows, insulation, over the next five years.
2)Â Â Â Â Â Â Â LED lighting rebate program.Â LED lighting is extremely energy efficient but is still cost prohibitive to many homeowners and businesses.Â LED lights use up to 75% less energy than the average light bulb.Â The state should offer a rebate program for businesses and homeowners to encourage the transition from traditional lighting to LED lighting.
5. Regional Economic Development
There are many regions of this state that are struggling well-beyond the Boston metropolitan area.Â Most notable are the former industrial cities that anchor these regions which have been struggling with double digit unemployment figures for the past year and a half.Â The current approach to economic development in the state is leaving these cities and the surrounding regions behind.Â The state needs a bold, innovative and coordinated approach that allows for the development of regional strategies to help these cities rebound.
- Provide a single point of contact.Â There should be a single point of contact at the state for municipal government to make sure that state assistance is targeted and that timely, meaningful and measurable results are achieved.
- Provide industrial cities with block grant funding.Â Create a block grant program that would foster a partnership between cities and state government.Â Cities should have a seat at the table and work collaboratively to develop strategies that fit the needs of their region.Â The strategy should include criteria established by the region and state with attainable goals towards economic development.Â Providing one source of funds and one point of contact at the local level will offer these cities the flexibility it needs to develop plans that meet the specific needs of their area, while making oversight and assistance from the state efficient and accountable.Â As a foundation, improvements should target the public schools and public safety.Â The block grants will allow cities and towns to target their funds to these areas to take innovative community-driven approaches to solving specific problems.
- Invest state funds in community banks.Â The state should work with community banks to establish partnerships to help entrepreneurs in former industrial cities access start up and expansion funds.Â If the state aggressively invested state funds in community banks in these locations, the banks will in turn lend to qualified entrepreneurs to help revitalize downtown areas.