Executive Office for Administration and Finance Tax Reform

Executive Office for Administration and Finance Tax Reform January 2013 Administration & Finance State House Rooms 373 & 272 Boston, MA 02133

Administration and Finance Our Goals In order to invest in education, innovation, and infrastructure, the Patrick-Murray Administration proposes to generate new revenue in accordance with these principles: 1. Any proposal to generate new revenue must be comprehensive, allowing us to pay our bills, maintain what we have, and invest in new development to foster economic growth 2. Any proposal to generate new revenue for transportation must be dedicated for that purpose 3. Any proposal to generate new revenue must be competitive and fair, both allowing Massachusetts to compete with our neighbors and protecting the most economically vulnerable among us 2

Administration and Finance Tax Revenue Proposal Personal Income Sales Corporate Income Status Quo New Rates Policy Changes Revenue 5. 25% 6. 25% Increase rate to 6. 25% (lower rate for short term capital gains to 6. 25%) $2. 57 B Increase personal exemption 2 x ($1. 09 B) Eliminate 45 tax expenditures $1. 33 B Lower rate to 4. 50% ($1. 37 B) Tax custom modifications to canned software and related computer services $265 M Eliminate FAS 109 deduction $76 M Eliminate special classifications for security and utility corporations $83 M Implement sales factor sourcing for services $35 M $4, 400/ $6, 800/ $8, 800* 6. 25% 8. 00% $8, 800/ $13, 600/ $17, 600* 4. 50% 8. 00% Total $2. 81 B ($1. 10 B) $194 M $1. 90 B *Personal exemption for Single/Head of Household/Joint filers. 3

Administration and Finance Impact to People Average Tax by Income Quintile $ 25 000 Avg. Income Tax Avg. Sales Tax $ 20 000 $ 1 700 $ 15 000 $ 2 300 $ 10 000 $ 17 600 $ 13 900 $ 5 000 $ 1 400 $ 1 000$ 800 $- $ 500 $ 400 $ 300 0 -20%, Current. New $ 700 $ 500 $ 1 100 $ 1 000 $ 2 300 $ 1 900 20 - 2040%, Current. New 40 - 4060%, Current. New $ 4 300 $ 3 500 60 - 6080%, Current. New 80 - 80100%, Current. New 4

Administration and Finance Allocation of New Tax Revenue: FY 14 -FY 18 and FY 23 5

Administration and Finance Transportation Need for New Tax Revenue FY 14 -FY 23 Transportation Financing Gap from “The Way Forward” Report Periodic, consistent fare/fee/toll increases (maintain real impact) and Western AET savings Mass. Port / Gaming / Convention Center contributions Indexing gas tax to inflation (maintain real impact) FY 14 $231 M* FY 15 $600 M FY 16 $700 M FY 17 $755 M FY 18 $755 M FY 23 $755 M *FY 14 allocation reflects items that can be implemented immediately and the launch of the capital program. 6

Administration and Finance Transportation Need: Solutions from Current Tools (Not Including Gas Tax) 7

Administration and Finance Transportation Need: Solutions from Indexing Gas Tax • Indexing the gas tax to inflation, beginning in FY 14, would generate $118 M in additional revenue by FY 21. Note: Analysis assumes 2% annual inflation. 8

50 0 California North Carolina Washington West Virginia Rhode Island Wisconsin Pennsylvania Maine Oregon Minnesota Ohio Kentucky Nebraska Montana Vermont Idaho New York Connecticut Utah Kansas South Dakota Nevada Maryland Delaware North Dakota Colorado Iowa Arkansas Tennessee Massachusetts Georgia Louisiana Illinois Texas New Hampshire Michigan Arizona New Mexico Federal Mississippi Indiana Alabama Virginia Missouri Hawaii Oklahoma South Carolina Florida New Jersey Wyoming Alaska Administration and Finance Gas Tax Fully funding the transportation investment would require increasing the gas tax to 60 cents per gallon (47 cents after solutions from current tools). 60 c/gal Data source: Federation of Tax Administrators. Total Gasoline Tax (Cents per Gallon) 60 47 c/gal 40 30 20 10 9

Administration and Finance Public Infrastructure Fund • All sales tax will go to a new Commonwealth Public Infrastructure Fund – Including amounts already pledged to the School Building Authority, the MBTA, and Mass. DOT • Amounts pledged to the School Building Authority, the MBTA, and Mass. DOT pass-through the fund without harm to funds or bonds supported by those funds • Amount pledged to Mass. DOT will be increased to cover transportation gap • The fund may be used for direct expenditure by the Commonwealth, grants, or debt service related to any public infrastructure • The fund is not intended for governmental infrastructure such as state offices or information technology, soft assets such as master plans, or administrative costs such as payroll 10

Administration and Finance Sales Tax Dedicated Entirely to Transportation and Infrastructure Allocation of Sales Tax 5, 00 4, 50 Cents on the Dollar 4, 00 3, 50 3, 00 2, 50 2, 00 1, 50 1, 00 0, 50 Other Infrastructure Transportation Gap MBTA MSBA FY 14 2, 15 0, 23 1, 12 1, 00 FY 15 1, 69 0, 69 1, 12 1, 00 FY 16 1, 57 0, 81 1, 12 1, 00 FY 17 1, 50 0, 88 1, 12 1, 00 FY 18 1, 50 0, 88 1, 12 1, 00 FY 23 1, 50 0, 88 1, 12 1, 00 Transportation ranges from 1. 02 to 1. 32 cents for FY 15 FY 23 (2. 14 to 2. 44 cents including the MBTA). 11

Administration and Finance Economic Competitiveness: Comparison to Other States Highlighted comparison states include neighbors (CT, ME, NH, RI, VT), industry competitors (CA, NJ, NY, OH, PA), and those ranked best for business (CO, GA, NC, VA, TX). 12

Administration and Finance Economic Competitiveness: Comparison to Other States Highlighted comparison states include neighbors (CT, ME, NH, RI, VT), industry competitors (CA, NJ, NY, OH, PA), and those ranked best for business (CO, GA, NC, VA, TX). 13

Administration and Finance Personal Tax Expenditures • Proposal eliminates 45 personal tax expenditures • This simplifies the tax code • If the goal is also a fairer tax code, reducing the sales tax and doubling the personal exemption is a more efficient way to achieve that result than retaining these personal tax expenditures • Impacts on individuals must be considered in light of all tax changes in the proposal, including reducing sales tax and doubling personal exemptions 14

Administration and Finance Personal Income Tax Expenditures: Proposed for Elimination 15

Administration and Finance Personal Income Tax Expenditures: Retained 16

Administration and Finance Corporate Tax Breaks • • Within the category of computer systems design and related services, 29 other states tax modifications to canned programs, and 14 other states tax custom programs With the migration of software first to the ‘web’ and now to the ‘cloud, ’ the line between software (currently taxable) and computer services (not taxable) is becoming untenable, and making these distinctions is difficult both for DOR and taxpayers 17