Governor Deval Patrick's Budget Recommendation - House 1 Fiscal Year 2014

Raising Revenue for Critical Investments

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Governor Patrick    FY 2014 Budget Recommendation:
    Issues in Brief

    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor


The Patrick-Murray Administration inherited a structurally imbalanced budget, the highest per capita debt in the country, a lack of transparency around state budgeting, and the absence of sound fiscal policies and a long-term framework for spending and borrowing.  Additionally, when Governor Patrick took office, the state faced large unfunded liabilities for the pension system and retiree health insurance benefits.  Moreover, chronic under-investment in our transportation infrastructure left our roads, bridges, and railways crumbling and portions of the state severely underserved.

These problems were compounded when Massachusetts – like virtually every other state in the nation – experienced an unprecedented fiscal collapse during the 2008-09 global economic downturn.  This culminated in a one-year drop in tax revenues of over $3 B and an estimated cumulative loss in revenue of $21.25 B between FY 2009 and FY 2013 (compared to typical revenue growth patterns and the typical minimum level of growth required to maintain government services).

This graph shows the $21.25 M revenue gap created by a dreop in revenue during the 2008-2009 economic downturn which has not recovered to the typical revenue growth patterns.

The Patrick-Murray Administration and the Legislature took a number of steps to address these fiscal challenges.  Governor Patrick has maintained balanced budgets throughout difficult fiscal times, relying principally on spending cuts and savings from reforms and efficiencies.  He instituted – and has adhered to – sound fiscal policies to ensure the state budget is structurally balanced.  The Governor also tackled long-term fiscal liabilities, achieving pension reforms and proposing additional changes to retiree health care benefits, which in combination would save the state and municipalities $25 B over the next 30 years.  As a first step towards a better transportation system, Governor Patrick increased transportation investments by billions of dollars and secured over $500 M in savings to date through a series of reforms, including consolidating the state’s transportation organizations in order to operate the state’s highway, bridge, and transit systems more effectively and efficiently.

Title: Filling the Revenue Gap - Description: This pie chart shows how the Commonwealth filled the revenue gap with $11.13 billion in in spending cuts and savings, $5.07 billion in Federal Stimulus Savings, a $3.57 million increase in sales tax, $863 M in rainy day funds, and $622 million in other one-time revenue sources.

On account of these actions, Massachusetts has achieved the highest credit ratings in its history under this Administration – AA+ from all three rating agencies – saving taxpayers $100 M in interest costs over the next 30 years.  The state also now has among the highest rainy day fund balances in the country.

This strong track record of fiscal reform and savings initiatives has enabled the Patrick-Murray Administration to continue to make some key investments in education, infrastructure and innovation, but it has not had the resources to make the level of investments in these areas required to support long-term growth and opportunity across the Commonwealth.  Indeed, in many areas the level of state services and investment has been scaled back significantly in order to live within even more constrained resources. Aid to cities and towns has been reduced, impacting local services such as police, fire, and public libraries.  Valuable state investments in state parks, economic development, affordable housing, and college affordability have all been curtailed.

We cannot meet the Commonwealth’s needs by cutting deeper or depleting the Rainy Day Fund.  Sustainably financing critical services and investments that are essential to long-term prosperity requires new revenue.  We have a generational responsibility to ensure a sustainably financed Commonwealth for our future prosperity.

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.

Revenue Proposal

To achieve these goals, the Patrick-Murray Administration proposes the following reforms to our tax system to raise $1.9 B on an annual basis:

  1. Cutting the sales tax from 6.25 percent to 4.5 percent and dedicating all proceeds to a fund for public works to support transportation, the school building fund, and other infrastructure.
  2. Increasing the income tax rate by 1 percentage point to 6.25 percent to raise sufficient revenue to support education initiatives. Doubling the personal exemptions so that the increase is fair to all taxpayers, according to their ability to pay.
  3. Eliminating outdated and overly complicated special favors in the tax code.

Economic Competitiveness

The chart below compares the Massachusetts sales tax rate, current and proposed, to that of other states.  Our proposed rate reduction would bring Massachusetts from nearly the top to close to the bottom of state sales tax rates, a tax that is widely regarded to be the most regressive tax that states impose.  In Massachusetts, there are no such locally-imposed sales taxes.

Title: State Sales Tax Rate Comparison (2011) - Description: This graph compares Massachusetts' existing and proposed sales tax rates to other states' sales tax rates. It shows that the proposed rate reduction would bring Massachusetts from nearly the top to close to the bottom of state sales tax rates.

This proposal keeps Massachusetts competitive by ensuring that our total state and local effective tax rate as a percentage of personal income remains in the middle of the pack relative to our neighbor and competitor states, as shown below.

Title: Total State and Local Taxes as a percentage of Personal Income - Description: This graph compares Massachusetts' existing and proposed taxes as a percentage of personal income, and shows that Massachusetts remains in the middle of the pack relative to neighbor and competitor states.

Tax Fairness

In addition, the Patrick-Murray Administration’s proposed tax reforms result in a fairer tax system.  Currently, the lowest-income taxpayers pay the highest percentage of their income in state income and sales taxes, and the highest-income taxpayers pay the lowest percentage of their income in state taxes, as seen in the chart to the right.

Title: Average Tax Burden by Income Quintile - Description: This graph shows how the average tax burden (both current and proposed) impacts different income groups. It shows that the increase in taxes will be most greatly felt by families in the top (80 to 100 percent) income group.

The Governor’s tax reform proposal flips that equation and ensures that all pay their fair share to support government services and investments we need to support growth and opportunity that benefits everyone.

Title: Effective Tax Rates by Income Group Current and Proposed - Description: This table shows the effective sales and personal income tax rates for each income group under the exsisting and proposed  policies). The table shows that the current tax structure is regressive and the proposed tax structure is progressive.

Ensuring Sustainably Financed Public Infrastructure for the Next Generation

The Patrick-Murray Administration understands the challenges associated with sustainably financing investments in our public infrastructure.  Therefore, the Administration proposes to dedicate all sales tax proceeds to infrastructure by depositing them in a dedicated Public Infrastructure Fund. Sales tax dollars already dedicated to the Massachusetts School Building Authority (MSBA) and the Massachusetts Bay Transportation Authority (MBTA) will be untouched and augmented by additional sales tax dollars dedicated to the Massachusetts Department of Transportation (MassDOT) to support transportation infrastructure investments and to other public infrastructure costs.

Title: Allocation of Sales Tax - Description: This graph shows the allocation (over time) of the new 4.5% sales tax rate to the Massachusetts School Building Authority (MSBA), the Massachusetts Bay Transportation Authority (MBTA), transportation, and other public infrastructure costs.

Allocation of New Tax Revenue

The Patrick-Murray Administration’s tax reform proposal will raise $1.9 B on an annual basis.  In FY 2014, it is expected to raise $779 M as a result of the fact that the tax law changes would take effect in the middle of the fiscal year.  In order to meet our existing and new investments needs in transportation, education, and innovation that ramp up over time, the Governor is proposing to allocate the new tax revenues among those purposes in the manner shown below.  This funding plan assumes that $400 M of the anticipated new tax revenue in FY 2015 and FY 2016 is borrowed to support investments in FY 2014 when the full-year revenue impact of the tax law changes will not be realized.

Title: Uses of New Tax Revenue by Fiscal Year - Description: This table shows the split of new tax revenue to existing and new Transportation, Education and Innovation investments from FY 2014 to FY 2018, with an additional snapshot of FY23.  Source:  Executive Office for Administration and Finance.

Additional Transportation Revenue

As noted in the report “The Way Forward,” MassDOT understands that sustainably financing transportation infrastructure will also require some transportation-specific revenue sources.  Other resources to finance the transportation investment needs will include:

  1. Indexing the gas tax to inflation;
  2. Creating a sustainable schedule for MBTA fare increases, Registry of Motor Vehicles (RMV) fee increases, and toll increases;
  3. Savings achieved through All-Electronic Tolling on the Turnpike (outlined in “Transportation Reform”); and
  4. Dedicating a portion of Gaming Commission and Convention Center Authority revenues to transportation needs.

Title: Revenue from Transportation-Specific Sources - Description: This table shows additional sources including MBTA Fares, RMV Fees, Tolls, Western Turnpike AET Savings, MassPort Contributions, Gaming, and the Convention Center between FY14 and FY23. In FY2014, these sources total to $25 million, and this ramps up to $538 million in FY2023.  Source:  Executive Office for Administration and Finance.

Title: State Gas Tax Comparison - Description: This graph compares the Massachusetts gas tax rate to other states,  showing that Massachusetts is in the middle of the pack. It also shows that the rates needed to fill the transportation funding gap if motor fuels exise were the only revneue sollution and the amount needed to fill the gap after all other transportation specific revenue sources are accounted for. At 60 cents per gallon and 47 cents per gallon respectively, these rates would put the Massachusetts gas tax above every other state.

It is important to note that revenue sources specific to transportation cannot responsibly be considered the sole means of covering all currently unfunded transportation costs that the state must address.  For example, fully funding the transportation needs from the motor fuels excise (the “gas tax”) alone would require increasing the gas tax from 21 cents per gallon to 60 cents per gallon.  As shown in the above chart, an increase of this magnitude would place Massachusetts at the highest gas tax level in the nation by almost 50 percent.  After accounting for all other transportation-specific revenue sources outlined in the chart on the preceding page, the gas tax would need to increase to 47 cents per gallon to adequately finance this critical investment.

Title: Revenue from Motor Fuels Excise: Current and Indexed to Inflation - Description: This chart compares the existing flat motor fuels tax to the proposed policy which would index the motor fuels tax to inflation. It also shows the additional revenue that would be brought in under the new policy.  Source:  Executive Office for Administration and Finance.

The table above details the projected increase in the gas tax rate and the additional state revenue projections from indexing to inflation.


The new revenue outlined above will allow the Commonwealth to sustainably and responsibly fund critical education, infrastructure and innovation investments necessary to support growth and opportunity for years to come. For a description of the proposed investments see the following Issues in Brief: “Investing in Education to Close the Achievement Gap,” “Investing in Innovation & Infrastructure to Create Jobs, Expand Opportunity,” and “Transportation Reform.”

Prepared by the Executive Office for Administration and Finance ·
For more information email: (617) 727-2040

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