POLLING: Voters Agree Obscure Provisions Shouldn’t Stand in the Way of Tax Relief

Recent reports have highlighted two unintended consequences of a proposal to lower the state income tax cut from 5% to 4%.

Far from reducing public support for the measure, these findings have served to stress how overcomplicated the state’s current tax system is if even policies meant to provide straight forward tax relief are seemingly booby-trapped.

Shining a Light on the State’s Obscure Tax Law Provisions

Recent reporting brought to light the fact that charitable deductions on Massachusetts tax filings are only allowed under state law when the income tax rate is exactly 5%. That means the deduction would disappear if the rate were to be lowered or increased.

Lawmakers originally tied the deduction to the 5% rate roughly 25 years ago as part of a plan to delay implementation of the charitable deduction and a lower income tax rate, both policies approved by the voters and then paused by the Legislature. Essentially, this is just a mechanical statutory trigger; there’s no inherent need for charitable deductions to operate alongside a 5% income tax rate.

While this is something the Legislature can and should fix, it’s worth looking at how it would impact taxpayers. Charitable deductions tend to benefit a relatively narrow share of taxpayers compared to broad-based tax relief. IRS data shows only about 9% of Massachusetts tax filers received a federal charitable deduction benefit in 2022, including just 4% of filers earning under $100,000 annually. A broad-based income tax reduction, by contrast, would provide relief to millions of taxpayers regardless of whether they claim charitable deduction benefits.

Taking the “Sting” Out of Small Businesses Taxes

Recent news reports also claimed that an income tax cut could actually increase taxes for certain small businesses that operate as “S-corporations.” It’s an oversimplification that misses the point on the state’s over-complicated tax code.

S-corps were originally designed to avoid double taxation by allowing small business income to pass directly through to owners’ personal tax returns (learn more in our video here).

Massachusetts, however, imposes an additional entity-level tax – known as a “sting tax” – on certain S-corporations with more than $6 million in annual revenue. Current law calculates this tax by effectively subtracting the state’s personal income tax rate from the higher corporate rate. This calculation means a lower income tax rate would technically increase the difference between the personal income tax rate and the corporate tax rate, theoretically driving up the rate. Massachusetts is one of only a small handful of outlier states to impose this added tax.

However, according to IRS data, roughly 90% of S-corporations nationally report receipts under $6 million, suggesting the vast majority of small businesses would still benefit directly from a lower personal income tax rate.

Public Support for Tax Relief Remains Strong

Recent MOA polling found that 82% of voters still support lowering the income tax rate from 5% to 4% even after learning it could reduce charitable deduction benefits and affect a small percentage of S-corporation business owners.

Most voters understand the larger issue at hand: these are not unavoidable consequences of a tax cut, but the reality of an outdated, increasingly unviable overall tax structure. 

Conclusion

The Commonwealth’s tax code is filled with outdated formulas, carveouts, and automatic triggers that create unintended consequences whenever policymakers attempt reform.The fact that efforts to provide tax relief to residents and small businesses throughout the state have become so complicated is itself a reflection of Massachusetts’ growing competitiveness problem.

These issues are not unavoidable. With targeted, common-sense reforms, lawmakers could modernize these provisions while still advancing broader efforts to improve affordability and strengthen the state’s long-term economic growth.