Commonwealth Conversations: Revenue

Personal income tax rate resumes march downward

 

 

Posted by:

Robert Bliss, Director of Communication, Department of Revenue

 

The Department of Revenue yesterday certified that the personal income tax rate will drop from 5.30 percent to 5.25 percent effective January 1, 2012. The savings to taxpayers will vary, but for most taxpayers it will be less than $40 and as little as $5 or $10 for those with smaller taxable incomes.

Despite the relatively small magnitude of the reduction, there is a lot of fiscal and politcal history behind it. The 0.05 percent decrease will mark the first decrease in the income tax rate in 10 years, and is the result of a legal process laid out in legislation approved in 2002.

That year, in the wake of both the dot com crash and the post-9/11 economic downturn, tax revenues in the Commonwealth fell and legislators scrambled to fill the gap. The House proposed to freeze the rate at 5.3 percent; it had been scheduled to drop to 5.0 percent effective Jan. 1, 2003, as a result of a voter referendum that had lowered the rate from 5.95 percent to 5.6 percent on Jan. 1, 2001 and to 5.3 percent on Jan. 1, 2002.

The Legislature wound up approving the freeze as well as a reduction in the value of personal exemptions for both single individuals and couples; the exemption dropped from $4,400 to $3,300 for individuals, and from $8,800 to $6,600 for couples.

In order to marshall legislative support for these tax increases, and to keep faith with voters who had approved the rate reduction to 5 percent, the legislature also created the process by which the personal exemptions would be restored to full value in four annual steps after which the income tax rate itself could resume its downward march.

The process involved a series of triggers and certifications. The first trigger; inflation adjusted baseline revenue growth had to exceed that of the previous fiscal year by 2.5 percent. But before final certification, revenues had to continue to remain steady, adjusted for inflation, over the months of September-November. If inflation adjusted revenue growth was not negative compared to the previous year in those months, the final certification for a rate reduction (or restoration of the personal exemption) would be issued no later than December 15.

That process was followed in the years subsequent to 2002, and the full value of the personal exemptions was restored in 2008 after four years of revenue growth.

But then the next and bigger revenue crash occurred in FY09, a year in which revenues fell more than $2.5 billion, removing the possibility of lowering the tax rate in accordance with the law.

It was not until FY11, which saw inflation adjusted revenue growth of 7.2 percent over FY10, followed by the required monthly certifications in the fall, that all requirements were met for the rate reduction that was announced yesterday.

 

Warning: Tax resolution firms dangerous to taxpayer health

Taxpayer Advocate  Dennis Buckley has issued the following alert:

So-called tax resolution companies continually market themselves as the solution to a taxpayer’s problems. Their pitch is simple: pay our company some money and our tax experts will lower and settle your tax liability.

These claims are false. DOR has issued warnings about these claims. If something is too good to be true, it probably isn’t, and that is certainly true about what these companies promise. DOR publishes all Offers in Final Settlement in its annual report. None were reached with the help of a tax resolution company; all were negotiated directly between the taxpayer and DOR.

These companies take money that taxpayers would be better served spending on reducing their tax liabilities. They offer false hope.

But the Taxpayer Advocate has just heard of a new tack from a tax resolution company that sinks to a new low: The company advised a client to deliberately break a payment agreement worked out with DOR.

 Specifically, the company advised a client to deliberately bounce payment checks sent to DOR as a way to get a better payment plan.

This is bad strategy and advice. In the case of this particular taxpayer, a bank levy was issued and an account used to make payroll was frozen. After the taxpayer contacted DOR, the levy was reduced to allow for payroll to be met. The taxpayer got no benefit from the company, only more problems.

Despite the promise of television and radio commercial, these companies will take your money and deliver nothing but broken promises.

From DOR's Briefing Book: more capital gains whiplash

Commissioner Amy Pitter presented DOR's revenue estimates for FY12 and FY13 in testimony heard Monday by the Ways and Means Committee at their annual Consensus Revenue Estimate Hearing.

The commissioner projected FY13 revenues at between $21.612 to $21.763 billion, up from $560 million to $683 million over the FY12 estimate of $21.046 billion to $21.080 billion.

Also presented to the legislators was DOR's FY13 briefing book, which is a treasure trove of economic analysis and forecasting.

The book is also the best single source document for DOR's view of capital gains tax collections, which over the years have proved to be exceptionally volatile and a trigger for deep revenue swings both up and down, so much so that legislation now enacted requires that any capital gains collection in excess of $1 billion go straight to the rainy day fund rather than into the general fund.

On pages 20-21, DOR outlines its estimates. Capital gains taxes increased from $500 million in tax year 2009 (down from $2.155 billion in tax year 2007) to an estimated $986 million in tax year 2010, an increase of nearly 100 percent.

On a fiscal year basis (tax years are calendar years; fiscal years run from July 1 to June 30 and span two calendar years) FY11 capital gains taxes are estimated at $991 million, an increase of $418 million or 73 percent from FY10.

DOR projects that capital gains will stay about the same in tax year 2011 at $986 million, but increase to $1.550 billion in tax year 2012.

On a fiscal year basis, that translates into estimated capital gains of $1.095 billion in FY12, an increase of $105 million over FY11, and capital gains revenue of $1.412 billion in FY13, an increase of $317 million over FY12.

Why the increase? DOR's forecast assumes that the Bush tax cuts will expire at the end of 2012, triggering a sell off of assets before the capital gains tax rate increases from 15 percent to 23.8 percent, along with the introduction of a 3.8 percent Medicare tax on realized capital gains included in the 2010 national health care reform law. 

As a result, DOR forecasts an increase in capital gains of 57.2 percent in tax year 2012, and then a precipitous drop of 42.4 percent in tax year 2013.

 

DOR assists AG's office in film tax credit fraud case

(Editor's Note: Following his arraignment in Boston Muncipal Court on Friday, Dec. 9, Daniel Adams was subsequently indicted by a Suffolk County Grand Jury on Monday, Dec. 12, and arraigned on Tuesday, Dec. 13 in Suffolk Superior Court. The Attorney General's office issued a press release after the indictment which describes the alleged fraud in more detail. Bail remains at $100,000 cash.)

Attorney General Martha Coakley today announced the arraignment of movie director Daniel Adams on charges of defrauding the Commonwealth's film tax credit program of $4.7 million.

The AG said that "today's action is an important step to ensure that the film tax credit is awarded appropriately while encouraging legitimate productions to be filmed here in Massachusetts. We want to thank the Department of Revenue for discovering this alleged fraud and working cooperatively with our office to investigate further."

The release recognized DOR investigators Janel Cosgrove and Tom Nowicki for their work on the case.

The investigation began in March 2010 when an investigator at DOR spotted suspicious tax returns connected to the "The Lightkeepers'" film. "Concerned that these returns might be fraudulent documents the DOR began an investigation and then referred the findings to the AG's Fraud and Financial Crimes Division," the AG's release said.

The alleged fraud centered on inflated payroll and production expenses for two films. Inflating the value of those increases the value of the film tax credit, which is equal to 25 percent of production costs. The AG alleges that Adams fraudulently claimed $4.7 million in film tax credits.

DOR recently released its 2011 film tax credit report. To date, 556 film productions have received $276.1 million in tax credits while spending more than $1.13 billion in Massachusetts 

 

A November anomaly: revenues of $1.365 billion are $62 million below last year but $53 million greater than forecast

The Department of Revenue has released the November 2011 revenue report outlining the details of the month's $1.365 billion collection.

The month is something of an anomaly -- the collection was less than last year's, but greater than forecast.

Commissioner Amy Pitter explained this odd dynamic. "The monthly benchmark was less than last year's collection due to the fact that DOR received more than $100 million in one-time payments in November 2010. As it turned out, DOR received settlements payments last month of more than $40 million, which helped push revenue over the reduced benchmark, but still left the collection less than November 2010."

November is a relatively small month for tax collections. There are no quarterly or estimated payments due for individuals and most corporations, so there is less revenue coming in, but refunds are still being paid to income tax and corporate tax payers who filed on extension, so there is more money going out.

Thus, the month is susceptible to revenue swings caused by receipt of one-time payments and settlements, or lack thereof.

Five months into FY12, overall collections are up $356 million or 4.7 percent from a year ago, and are $40 million above the revised (as of mid-October) benchmark of $20.010 billion

Two big revenue months, December and January, will provide a better glimpse into the track of Commonwealth revenues heading into the second half of FY12. Those are months in which fourth-quarter income tax estimated payments -- which reflect taxes paid on capital gains and on interest and dividends recorded in tax year 2011-- start to be tallied (with the final accounting coming in April-June).

Taxpayer Advocate to meet with practitioners Dec. 14

In announcing a new program called DOR 360, DOR Commissioner Amy Pitter has stated her intent to have DOR listen closely and carefully to the concerns of DOR's many stakeholders. 

 As part of this initiative, The Taxpayer Advocate will host a meeting on December 14, 2011 from 8 a.m. to 10 a.m. at 100 Cambridge Street, Boston, MA in Room B on the second floor of the Saltonstall Building. 

 The purpose of this meeting is to listen to concerns, issues and recommendations regarding the Abatement, Appeals and Litigation processes. Accountants, tax preparers, lawyers with tax law practice and any others who file returns or represent taxpayers are welcome to attend. 

 This meeting is intended to identify what is working and needs to be retained in these processes as well as hear what is not working and needs to be modified, redesigned or changed.

 Unlike recent practitioner liaison meetings, this meeting will not be videotaped for posting on the DOR web site. For those interested in learning more about DOR 360, please watch the video interview with Commissioner Pitter posted recently on DOR's home page at www.mass.gov/dor.

 

 

 

 

 

 

 

 

 

 

 

 

Amazon firmly in support of online sales tax legislation

Any lingering doubts that the nation's largest online retailer, Amazon, is now in full-throated support of federal online sales tax legislation were dispelled with testimony this week from a top company official before the House Judiciary Committee.

Paul Misener, vice president, Amazon global public policy, speaking in Washington D.C. Wednesday in a hearing broadcast on C-Span, got right to the point when, in the second paragraph of his testimony, he said: "Mr. Chairman, Congress -- and only Congress -- may, should and feasibly can authorize the states to require out-of-state sellers to collect the sales tax already owed."

For those who needed to hear the message again, in his fifth paragraph, Misener said: "Congress should authorize the states to require collection, with the great objects of protecting states' rights, addressing the states' needs, and leveling the playing field for all sellers."

Not to put too fine a point on it, but here was the nation's largest internet retailer -- and long-time foe of internet sales tax collection -- stating without qualification that there is not a constitutional right to shop on the internet tax free, despite the protestations of anti-tax advocate Grover Norquist that an internet sales tax constitutes a new tax, rather than one already on the books.

In Massachusetts, as in the other 44 states with sales tax, consumers who purchase an item from out of state for use in Massachusetts are supposed to pay a use tax (equivalent to the sales tax) and can do so on their state income tax return, on line 33. Few make this observance. In tax year 2010, of some 3.4 million tax filers, 54,387 (about 1.6 percent of all filers) paid $4.799 million in use tax, an average of $88.25 per taxpayer.

Misener noted that states have a considerable financial interest in taxing internet sales. "The states' financial needs should be addressed. The states face serious budget shortfalls, yet the federal government faces its own fiscal challenges. Congress should help the states' budget shortfalls without spending federal funds, by authorizing the states to require collection of the billions of revenue dollars already owed," he said. 

Interestingly, in a political era that appears devoid of bipartisan support for much of anything, the Wednesday hearing evinced some of that support. In fact, Republicans from states such as Wyoming, Tennessee, Missouri, Arkansas, North Carolina, Florida and Texas have already stated their support for H.R. 3179 and S. 1832 despite having signed Norquist's no new tax pledge.

One of the 11, U.S. Rep. Steve Womack, R-Ark., asked if these bills could be construed as a violation of Norquist's pledge, replied, according to State Tax Today (subscription required), that nowhere in the tax pledge does it say that collecting legally owed use taxes amounts to a tax increase.

Not all internet retailers share Amazon's position; Overstock.com testified against, as did eBay. In his testimony, Overstock Chairman and CEO Dr. Patrick M. Byrne said, "The question the Committee must consider is whether innovative remote sale companies will emerge, employ Americans, and help our economy grow if Congress alters the status quo by allowing states to burden interstate commerce ... Pass of such legislation would curtail the emergence of the next innovative E-commerce company and poison the internet's fertile ground for growth and innovation."

As previously noted in this DOR blog post, Amazon's position has evolved to the point where it now sees itself as a hired gun in the collection of internet sales tax for other internet retailers.

(Editor's note. Commonwealth Magazine has just published its own survey of the internet sales tax issue.)

DOR warns of Senior Circuit Breaker Tax Credit scam

The Department of Revenue today released a statement from Taxpayer Advocate Dennis Buckley warning the public, tax preparers, and those who assist seniors in preparing tax returns of a scam that surfaced last year involving the popular Senior Circuit Breaker Tax Credit.

"The Senior Circuit Breaker Tax Credit last year helped nearly 80,000 state residents receive a refundable tax credit. Unfortunately, several unscrupulous tax preparers coaxed elderly public housing residents to fraudulently apply for the credit (residents of public housing are ineligible for the credit).

"The preparers who participated in this scam asked for a payment to submit the fraudulent application, and some seniors received the credit without actually qualifying for it. The Department of Revenue has notified those senior residents that the refund was obtained fraudulently and must be paid back.

 

"We ask you to share knowledge of this scam with your colleagues. Seniors are not eligible for the Senior Circuit Breaker Tax Credit if they live in public or subsidized housing," Buckley wrote.

 

The Senior Circuit Breaker will deliver a maximum tax credit of $980 in tax year 2011.

City and Town publishes Q and A on regionalization grants

The Division of Local Services publication City and Town today published a Q and A on Community Innovation Challenge Grants.

Grant applications to promote regionalization or to enact reform and efficiency initiatives on the local level are due Jan. 17th, with recipients of the award to be notified in February 2012.

The Q and A contains a link to additional information such as grant guidelines and an application. The link will also carry an expanded Q and A coming soon to the page.

The goal of the program is provide significant incentives and financial support for one-time or transitional costs related to improving local government service delivery efficiency, service quality, and achieving cost savings through either:

(1) Regionalization; shared services, joint or regional facilities, intergovernmental agreements, consolidations, mergers, and other types of collaborations, or

(2) Other reform and efficiency initiatives; for a single entity to plan and implement innovative internal efficiency initiatives to improve the quality and efficiency of service delivery in ways that achieve cost savings.

Criteria for selection will include, but are not limited to: innovation; potential for greatest impact; cost savings and/or other tangible benefits such as service enhancements, service delivery efficiencies, or other benefits; demonstrated feasibility of successful implementation; speed of project timeline for completion; and potential applicability to other local governments.

The program provides $4 million in grants, with no single grant larger than $500,000. 

Blue Cross Blue Shield releases report on state's health law

The Blue Cross Blue Shield Foundation of Massachusetts recently released a report on the state's five-year old landmark health care law.

Given the national clamor over health care reform generated in the Republican presidential primary campaign, as well as the recent decision of the U.S. Supreme Court to hear arguments over the constitutionality of the federal health care law, the BCBSFMA report is especially timely as a point of reference to view the progress of what is widely viewed as the model for the nation's health care law.

"The overarching goal of the 2006 Massachusetts health reform law was to achieve nearly universal health insurance coverage for the state’s 6.5 million residents," the report states."

"In the five years since the law’s enactment, that goal has been effectively achieved. An estimated 98.1 percent of Massachusetts residents have health insurance coverage, including 99.8 percent of children. The gains in coverage, most of which occurred during the first two years of health reform implementation, have been maintained despite the effects of the nation’s severe and sustained economic downturn.

"So what lies ahead? To a large extent, the future of Massachusetts health care reform will be shaped by two major questions. Can the state's high rate of health care spending be moderated? And what will be the impact of the national Patient Protection and Affordable Care Act?  All of the stakeholders involved in shaping the 2006 health care reform law now agree that the top priority for Massachusetts health care is to make it more affordable.

"There is also a broad consensus that reforms in provided payment need to be accompanied by significant improvements in the efficiency, effectiveness and coordination of patient care and by an increased commitment to prevention, wellness, Still to be determined is what, if any, combination of legislative action and private sector initiatives on the part of providers, insurers employers, and consumer can 'bend the trend' and make high-quality health care more affordable."

BCBSFMA has also published a fact-checking report compiled by the Annenberg Public Policy Center. The report (one of many published by the Center's FactCheck.org) reviews the various claims about how the Massachusetts law is or is not working, and is a great resource for facts, as opposed to fiction.