“Ability” To Pay Taxes vs. “Inability” To Pay Them: What’s At Stake?

Wonk alert indicator: slightly elevated (orange).

In tonight’s State of the Commonwealth address, Governor Patrick advocated for his proposal to double the personal income tax exemption by saying (my emphasis) that it would make the income tax increase “fair to all according to their ability to pay.”

He probably would have been smarter not to phrase it that way.

Amendment 44 of the State Constitution constrains the ability of the Legislature to construct a progressive system of taxes by requiring that income taxes be imposed “at a uniform rate” with respect to the same class of property. But the Amendment does permit the Legislature to “grant reasonable exemptions and abatements,” which offers some opening for a more progressive tax system. One question about the Governor’s proposal for a doubled personal exemption will be whether the exemption is a “reasonable” one and therefore constitutional.

The most recent Supreme Judicial Court decision on Amendment 44 is Peterson v. Commissioner of Revenue, 444 Mass. 128 (2005). In that case, the Court went on — at some length — to differentiate exemptions that are based on a taxpayer’s inability to pay (these pass constitutional muster) from exemptions that are based on ability to pay. These latter exemptions, those based “only on relative ability to pay (as opposed to inability to pay),” do not qualify as reasonable.

A longer excerpt of the Court’s opinion is below.

In the long run, the fact that the Governor justified his plan tonight as “fair to all according to their ability to pay” may not make a lot of difference. (For one thing, the Court’s opinion referred to exemptions based “only on relative ability to pay,” so the meaning of the words “only” and “relative” must be teased out.) But by using that phrase, he may have made it a little easier for opponents to argue, citing SJC precedent, that the exemption is an unreasonable one. A change in talking points would be advisable.

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From Peterson v. Commissioner of Revenue:

In assessing the reasonableness of an exemption from income tax under art. 44, we also consider the purpose of the exemption. Exemptions premised on a taxpayer’s inability to pay have passed muster. See Opinion of the Justices, 426 Mass. 1206 , 1208 (1998) (elderly taxpayers living on less than $30,000 per year “truly need the exemption” where Legislature found they “wholly ‘lack the ability to pay’ more taxes”); Opinion of the Justices, 270 Mass. 593 , 599-600 (1930) (exemption permissible where taxpayers had no income above that needed for own support; Legislature has discretion to grant exemptions so that taxes may be “apportioned among all the people to the end that the burdens for the support of government may rest as nearly equally as possible among those able to bear them”). Exemptions may also be permissible where they operate, in their over-all effect, to remedy inequality in tax treatment. See Massachusetts Teachers Ass’n v. Secretary of the Commonwealth, 384 Mass. 209 , 245 (1981) (deduction for taxpayers who rent homes permissible where it “tends to reduce the disparate treatment of the home owner and home renter in the operation of the income tax law”). By comparison, exemptions that are based only on relative ability to pay (as opposed to inability to pay) do not qualify as “reasonable” under art. 44. See Massachusetts Taxpayers Found., Inc. v. Secretary of Admin., 398 Mass. 40 , 46-47 (1986). There, despite the fact that a graduated income tax system could be viewed as “reasonable” in the abstract, a complex system of graduated exemptions based on levels of income was apparently intended to tax the same class of income at different rates rather than to impose the tax burdens “as nearly equally as possible among those able to bear them,” and therefore violated art. 44. Id. at 45-46, quoting Opinion of the Justices, 386 Mass. 1223 , 1229 (1982).

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