New Revenue Cap Means Responsible Budget Growth

An MOA-inspired income tax cut is headed to the ballot this fall. Our recent analysis finds the cut would not only put more money in taxpayers’ pockets – it would also increase long-term economic growth. 

But Massachusetts’ high-taxes stem from a larger spending problem. State spending has increased by $20 billion since 2018 – far outpacing household incomes and inflation. 

To increase our state’s competitiveness longterm, an income tax cut should be paired with a revised revenue cap – a policy that will also appear on the ballot in 2026. An MOA analysis shows that enacting the two measures together would lock in sustainable future revenue growth with minimal negative impacts on state tax collections.  

How The Revenue Cap Works

The proposed revised revenue cap would ensure the revenue collected in any given year is no more than a certain percentage on top of last year’s collections. If the state collects more than this limit, it would “trigger” a return, and the excess funds would be paid back to taxpayers.

This doesn’t cut revenues. It simply means revenue is allowed to grow responsibly, tied to historical precedent and household earnings.

Right now, the state bases the upcoming year’s limit on growth over last year’s calculated limit (which historically is higher than actual revenue collected). This means historically the cap has been set arbitrarily high, and therefore has only been triggered twice in forty years. The last time it was triggered was FY 2022, and the overall return to taxpayers was about $3 billion.

The revised version would trigger tax returns more often, limiting the chance for the state to inflate spending. As a result, taxpayers would receive more frequent and more modest returns (averaging roughly $410 million annually). Had this revision been in place from the beginning, taxpayers would have seen refunds triggered at least 23 times since 1986.

Revised Revenue Cap Would Complement Income Tax Cut

The proposed income tax cut would drop the rate from 5% to 4% over three years. During this implementation, state revenues would experience a modest drop, before growing at twice the rate they would have without a tax cut.

Our recent analysis found that any short-term dip in revenue would not be further impacted by the revised revenue cap. That means no refunds would be triggered while the tax cut was being phased in. Only once revenues begin to grow again – which will begin once the tax cut is fully in place – may the revenue cap begin to limit excessive revenue growth.

Conclusion

MOA modeling shows the proposed revenue cap would not trigger any drastic changes in state revenue, but rather provide a much more modest fix to the state’s existing spending problem. While an income tax cut would provide for long-term economic growth, the revenue cap will ensure this growth happens responsibly, while refunding taxpayers any excess collections. It would also ensure Massachusetts’ state budget grows more sustainably and keep pace with household earnings, limiting drastic increases to state spending.

This is a key solution to boosting Massachusetts’ competitiveness with other states. Providing tax relief that will be protected for years to come helps families afford to live here, increases attractiveness for businesses to invest and bring employees here, and boosts the state economy. Making sure revenue and spending are kept in check will put the state back on track as an economic leader.