Massachusetts relies heavily on the taxation of personal income to fund annual operating expenses, collecting approximately 55% of all tax revenues from this source. The Commonwealth taxes both earned (salaries, wages, tips, commissions) through the withholding tax and investment (interest, dividends, and capital gains) income. The tax rate was lowered to 5% for tax years beginning January 1, 2020, and after. Massachusetts has a flat rate, meaning that all income of the same types must be taxed at the same rate, but different income types can be taxed differently. For example, certain short-term capital gains are taxed at 12%.
Massachusetts provides a wide array of credits (dollar for dollar offsets of tax liability) including an earned income tax credit, a circuit breaker credit and a solar, wind and energy tax credit. Because income, particularly from capital gains, is closely tied to economic performance, it can be a volatile source of revenue.
MTF monitors income tax collections closely because of their importance to the annual operating budget, paying close attention to the volatility of the investment income and the need to divert some of this revenue to the state’s Stabilization Fund.