FACT CHECK: Income Tax Cut Won’t Cost $5 Billion

This week, the Massachusetts Special Joint Committee on Initiative Petitions held a hearing on two proposed laws: an income tax cut from 5% to 4% and a revised state revenue cap.

Testimony from the Mass Taxpayers Foundation claimed that lowering the income tax rate would create a $5 billion hole in the state budget. This claim has been echoed in similar analyses from the Tufts Center for State Policy Analysis, and from advocacy groups opposed to any tax relief.  

MOA’s research – also cited at the hearing – reaches a different conclusion, finding this policy would have a modest impact on state income tax revenues in the phase-in years, and also help our economy grow faster long-term.

What sets MOA’s analysis apart from other reports? Essentially, other estimates of how an income tax cut would impact the Commonwealth don’t account for two key things: 1) The history of how the Massachusetts budget has operated and adapted to past tax cuts, and 2) A dynamic look at our economic future and how a tax cut would stimulate the overall economy.

Let’s break it down. 

FACT: $5 Billion Price Tag On An Income Tax Cut Is Unrealistic   

Reports by the Mass Taxpayers Foundation (MTF) and Tufts University claim the proposed tax cut will cost the state $5B or more a year.

To arrive at this figure, both reports use a simple back-of-the-envelope calculation, taking what the state would hypothetically collect under the current 5% individual income tax rate in future years and reducing it by the size of the tax cut. This isn’t really analysis. In the case of the MTF report, the report essentially takes its projected personal income tax revenue base ($27 billion) and divides it by five, proportional to the size of the tax cut. Even with some minimal tweaking of this approach, the Tufts report leaves out significant historical and economic context needed to understand actual revenue impacts.

Revenue projections under the status quo 5% rate are just that – projections. The state projects revenue levels every year, and ends up revising them over time due to constantly changing economic conditions.

That’s why relying on hypothetical projections for state revenue doesn’t give us a clear economic picture. State budget officials don’t look at annual revenue collections and lament they could have raised more under a higher tax rate. They look at previous budgets under previous actual revenue collections and actual economic conditions, and adjust accordingly. Looking at the impact of this tax cut on the state’s budget habits should follow the same logic.

This approach ignores how people and the economy actually respond to tax policy. 

That matters, because tax policy does not operate in a vacuum. Revenues are not static, and Massachusetts’ economy is not frozen in time. Measuring the impact of a tax cut against a hypothetical future using one year of data misses the bigger picture.

FACT: Economic Context Shows An Income Tax Cut Will Have a Modest Impact On Revenue 

MOA built a comprehensive statistical model that incorporates nearly three decades of state data. This includes periods of economic expansion and recession, as well as multiple changes to the state’s income tax rate. The model controls for key factors such as inflation, state GDP, unemployment, and changes in the number of taxpayers, allowing for a far more realistic estimate of how revenues respond over time.

This model tells a very different story than other reports: instead of dealing in hypotheticals, it estimates annual revenue levels every year of the tax cut phase-in and beyond. This way, MOA was able to look at net year-over-year changes to income tax revenue, more in line with how annual budgets are formulated. 
We find during the three-year phase-in of the tax cut, the average annual revenue impact is estimated at about $680 million, with a total net effect of roughly $2 to $2.2 billion depending on economic conditions. Since the tax cut does not change the 4% surtax on income over $1 million, any impacts to surtax revenue would not be due to reducing the overall income tax rate.

The Commonwealth can afford these modest, short-term reductions in income tax revenue. In FY25 alone, the Commonwealth added more than $6 billion in spending between the enacted budget and the final budget – more than this tax cut would reduce revenue over a three-year period.

FACT: An Income Tax Cut Will Create Positive Economic Outcomes

The Tufts report claims an income tax cut will cause a $5+ billion revenue loss. It also claims that shifting tax dollars back into people’s pockets “makes it hard” to boost the state economy.

Economic research spanning decades says otherwise. Economists find reducing personal income tax rates increases GDP substantially. In fact, according to a variety of studies over the last few decades, MOA estimates the proposed tax rate cut could boost the state’s economy by as much as $17.5 billion after a few years. 

This is because economists also find income tax cuts boost consumer spending, often due to residents retaining more of their income. A Federal Reserve Bank of New York study finds this positive effect is more likely if the tax cut is permanent (rather than temporary relief). 

After full implementation of the proposed rate reduction, income tax revenue growth is projected to accelerate significantly – and eventually surpass revenues under the status quo. The current average annual growth rate of about 1.5% is expected to nearly double after implementation. That increase reflects a broader economic effect – when taxpayers keep more of their income, it translates to more investment, job creation, and overall economic activity.

FACT: Massachusetts’ Past Income Tax Cuts Did Not Reduce State Revenues

Perhaps the greatest estimate of what the proposed income tax cut will do for Massachusetts lies in what has already happened under previous tax cuts. 

Research from the Pioneer Institute shows that after the state’s last major income tax reduction, dire predictions of long-term revenue collapse did not materialize. In fact, under the rate reduction from 5.95% to 5.6% in 2001, inflation-adjusted revenues grew by $1 billion. In 2002, revenues were negatively impacted by external shocks such as the September 11 attacks and stock market crashes following the dot-com bubble. However, subsequent income tax cuts saw income tax revenues stabilize or grow every year, eventually surpassing previous levels even at the lower rate.

Conclusion

The lesson is straightforward: Alarming estimates of what an income tax cut would cost the state may grab headlines and spark fear. However, they do not reflect Massachusetts’ history with tax cuts, taxpayer behavior, or economic conditions. 

By developing a dynamic model that takes into account decades of Massachusetts’ budget history and economic performance, we estimate the year-over-year impacts of a tax cut would be modest and temporary. In the long-term, a tax cut would allow the state and its revenues to grow faster than before.

Many states are already doing this, and becoming more competitive for residents and businesses. As of 2026, more than half of U.S. states have cut income taxes. Many of them have seen a net gain in residents – while Massachusetts continues to see net outmigration. 

The history of the Commonwealth shows the state can provide meaningful tax relief while maintaining a stable and growing revenue base.