Massachusetts Governor Deval Patrick released his FY2014 budget recommendations to mixed reactions from the legislature and business community due, in part, to the tax changes proposed. This article briefly discusses the budget proposal and outlines the next steps in the budget drafting process.
To address the Commonwealth’s balanced budget requirement and expected shortfalls in revenue, as well as concerns about the repairs needed to aging roads and bridges, Massachusetts Governor Deval Patrick released his fiscal year 2014 budget proposal, which contains some of the largest tax increases in more than a decade. Governor Patrick’s proposals would increase the state income tax from 5.25 percent to 6.25 percent, providing an additional $2.81 billion in revenues. They would also amend the tax code with respect to corporate income tax items, bringing in an extra $200 million. While the governor proposed decreases in the state sales tax, the net increase in total revenues is close to $2 billion.
More specifically, some of the governor’s proposals include:
Increasing the income tax rate from 5.25 percent to 6.25 percent
Decreasing the sales tax rate from 6.25 percent to 4.5 percent
Repealing the FAS 109 deduction
Modernizing the sales factor for apportioning the corporate excise by sourcing to where services are received
Indexing the gas tax to increases in the Consumer Price Index
Implementing a sales tax on soda and candy
Repealing several personal income tax deductions, such as the exemption on capital gains on home sales, and on employer-paid premiums on group-term life insurance
But now what? What does all of this mean and when will Massachusetts residents and businesses feel the effect of these proposals? The answer depends upon the dynamic between the governor and the legislature, and the extent of the business community’s opposition to or support for these proposals.
The state’s budget drafting process began with the governor putting his ideas on the table, signaling the start of a six-month process during which the legislature will comb through the proposed budget and add, delete or otherwise amend it. The final budget is likely to be enacted just prior to the beginning of the new fiscal year on July 1, 2013, and it will look quite different from the proposal offered by the governor on January 23.
With that said, many Beacon Hill insiders agree that at least some of the governor’s proposed tax increases and potentially the reduction in sales tax, may make it into the final state budget. Once the legislature passes the budget toward the end of June, the governor will then have an opportunity to veto or return the budget to the legislature with his own additional recommended changes. If the legislature’s budget fails to embrace some key elements of the governor’s proposed budget, it is safe to assume that the governor may use this power to reinsert his own proposals back into the budget.
If the state’s multi-billion dollar budget drafting process were a game of football, we would be at the opening kickoff. For the next few months, it will be crucial for businesses to review the budget proposed by the governor and present their concerns to the legislature. Clearly, tax increases will not be favorably received by many in the business community, but business leaders need not assume that the state’s former moniker of “Taxachusetts” will become a reality. Public input, most especially from the business community, has helped to frame the issues and defeat or reshape past tax proposals. The circumstances surrounding this year’s budget are no different.
If you are following this issue and want more detail, please contact your regular McDermott Will & Emery lawyer or one of the authors of this article.