JALSA in Boston Business Journal on Charitable Giving State Income Tax Deduction

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Excerpt from Ballot initiative to cut income tax could raise taxes, eliminate charitable deduction

A ballot initiative to cut the income tax could, paradoxically, end up raising taxes, according to a state office's new report.

Researchers at the Executive Office of Administration and Finance said that because of a passage concerning charitable deductions, and how the S-corp tax rate is calculated, the initiative would have a knock-on effect.

The proposed question, which argues its case to be on the ballot before the Supreme Judicial Court on Monday, would lower the state personal income tax rate from 5% to 4%.

Nonprofits express concern over charitable giving

The Executive Office of Administration and Finance, which is part of Gov. Maura Healey's executive branch, said that if the tax rate is changed at all from its current 5% rate, it could mean that the state charitable deduction, which allows taxpayers to deduct charitable contributions on their state tax returns, would need reform. Healey has expressed opposition to the ballot initiative.

The law, as written, doesn't allow for the charitable deduction if the income tax rate is anything but 5%.

The Department of Revenue estimates it could lead to around $480 million in lost charitable giving if taxpayers can't claim the deduction. In a time of federal cuts and sky-high competition for grants, Jim Klocke, CEO of Massachusetts Council of Nonprofits, said that the potential loss of the deduction could not come at a worse time.

"Things are so turbulent in terms of policy, in terms of funding sources at the federal level," Klocke said. "That has all kinds of ripple effects locally and at the state level."

One representative at the Mass High Tech Council, which is behind the ballot initiative, said that the legislature could update the code the same way it did when it updated sections of 62F when voters passed the millionaires tax in a way that protects the charitable deduction if voters decide to pass it.

But nonprofit leaders said that leaving it up to a legislature that often moves slowly, at a time when funds are critical for nonprofits, is risky.

"I don't think it's much of a defense to say, 'oops, we accidentally wiped out a state tax deduction that benefits the entire nonprofit sector of the state, and that maybe the legislature could change it if they want,'" said Cindy Rowe, president and CEO of the Jewish Alliance for Law and Social Action. "I think that the people who proposed the deduction from 5% to 4% in that ballot question maybe should have been a little more careful not to have a huge impact on the nonprofit sector that provides so many services to the people in our state."