This proposed law would change the state personal income tax laws if a proposed amendment to the Massachusetts Constitution requiring income tax rates to be graduated is approved at the 1994 state election. This proposed law would (1) set graduated income tax rates to replace the existing tax rate structure, (2) change exemptions and deductions relating to dependents, child care expenses, head of household status and personal exemptions, (3) establish a property tax and water rate credit of up to $200 for taxpayers below certain income levels, (4) increase the maximum income levels for no-tax status and the limited income credit, (5) establish a "capital formation incentive" to replace the existing capital gains exclusion, and (6) provide that taxpayers will not pay more Massachusetts income tax for 1995 than they would have paid under 1992 law, if their 1995 adjusted gross income is below certain levels (for instance, $60,000 for single filers and $100,000 for married couples filing jointly)

(1) PROPOSED GRADUATED INCOME TAX RATES WOULD:

• Set the following state tax rates for all Massachusetts taxable income (after subtracting applicable deductions and exemptions):

[see official source]
Tax Rate single married filing jointly married filing separately head of household
5.5% up to $50,200 up to $81,000 up to $40,500 up to $60,100
8.8% over $50,200 up to $90,000 over $81,000 up to $150,000 over $40,500 up to $75,000 over $60,100 up to $120,000
9.8% over $90,000 over $150,000 over $75,000 over $120,000
[see official source]

A taxpayer whose total taxable income exceeded the upper limit for the 5.5% or 8.8% income bracket would still be taxed at the lower rate for income within that bracket. For example, a single person with $100,000 in taxable income would be taxed at 5.5% on $50,200 of that income, at 8.8% on the next $39,800, and at 9.8% on the remaining $10,000 of that income. The income brackets would be increased annually, starting in 1996, to account for changes in the cost of living.

•Eliminate the existing division of Massachusetts income into Part A income (generally, dividends, capital gains, and certain interest), currently taxed at 12 percent, and Part B income (all other income), currently taxed at 5.95 percent.

•Create a "head of household" filing status for single persons who have dependents and who file federal returns as heads of households.

•Prevent any gain from the sale of a taxpayer's principal residence from being taxed by the state at a rate higher than 6%.

•Provide that non-residents would pay tax on their Massachusetts income based on the income rate brackets applicable to their total income (including Massachusetts and other income).

(2) PROPOSED CHANGES IN EXEMPTIONS. DEDUCTIONS AND CREDITS WOULD:

Replace the child and dependent care expense deduction with a child and dependent care tax credit equal to 60% of the federal child and dependent care tax credit.

•Increase the existing exemption for each claimed dependent from $1,000 to $2,000.

•Allow heads of households a personal exemption of $3,400, plus $2,200 if blind and $700 if 65 years of age or over.

•Reduce personal exemptions gradually for taxpayers whose adjusted gross income exceeded $60,000 for single filers, $100,000 for married persons filing jointly, $50,000 for married persons filing separately and $80,000 for heads of households. The personal exemption would be eliminated entirely for filers whose adjusted gross incomes exceeded these amounts by more than $50,000 ($25,000 for married persons filing separately). These amounts would be increased annually, starting in 1996, to account for changes in the cost of living.

•Allow interest and dividends from deposits in all banks and institutions to qualify for the $100 deduction ($200 for married couples) currently applicable only to Massachusetts bank interest and dividends.

•Allow the $1000 net capital loss deduction to be taken against all income, not just against Part A income as current law provides.

(3) PROPOSED PROPERTY TAX AND WATER RATE CREDIT WOULD:

•Create a property tax and water rate credit of up to $200 for eligible homeowners and renters who have total incomes less than: $30,000 for married couples, $25,000 for head of household filers and $20,000 for single filers. The amount of the credit would depend on the amount by which the taxpayers' real estate property tax and water charges exceeded 10% of their income. 20% of tenants' rent would be treated as a property tax payment for these purposes. If the taxpayer had no income tax due, the amount of any credit due would be paid to the taxpayer, as long as the state Legislature made any appropriation necessary to pay such refunds.

(4) PROPOSED $2000 INCREASE IN THE EXISTING INCOME THRESHOLDS FOR NO-TAX STATUS WOULD:

•Exempt taxpayers at or below the following levels of adjusted gross income from paying income tax: $14,000 for married couples filing jointly, $12,000 for head of household filers, and $10,000 for single filers. These levels would be adjusted annually, starting in 1996, to account for changes in the cost of living. The new levels also would apply to the limited income credit which is available to taxpayers with adjusted gross income up to 175 percent of these levels.

(5) PROPOSED CAPITAL FORMATION INCENTIVE WOULD:

•Replace the current 50% capital gains deduction with a' 'capital formulation incentive" deduction, which would allow partial deductions for gains from the sale or exchange of qualified stock issued by certain corporations that employ 50% or more of their employees in Massachusetts.

•Only gains on original stock purchase donor after January 1, 1995 from certain corporations engaged in active business, and held for required periods of time, would qualify for the deduction. The amount of the deduction would be 30% of the gain on stock held at least 3 years; 50% for stock held at least 5 years; and 70% for stock held at least seven years. Detailed provisions would restrict the benefit of this deduction to stock issuances which reflect new investments in businesses, and would disqualify stock in certain types of corporations that receive special tax treatment under existing law.

(6) PROPOSED CAP ON TAX LIABILITY FOR CERTAIN TAXPAYERS IN 1995 WOULD:

•Excuse taxpayers at or below the following levels of adjusted gross income, as determined under the proposed law, from owing more Massachusetts income tax in 1995 than they would have owed under 1992 law: $100,000 for married couples filing jointly, $80,000 for heads of households, $60,000 for single filers, and $50,000 for married persons filing separately.

(7) EFFECTIVE DATE:

If the State Constitution is amended at the 1994 election to require graduated income tax rates, the proposed law would be effective beginning in tax year 1995. The proposed law states that if any of its provisions were found invalid, the other provisions would remain in effect.

Note: Wherever this summary refers to current or existing law, the reference is to the law in effect in August 1993, when this summary was was prepared.