The relatively modest reduction in the state income tax rate scheduled to occur on January 1, from 5.25% to 5.2%, will not occur, as the financial yardsticks necessary for implementation have not been met.

As you may recall voters opted to lower the income tax rate from 5.95% to 5% by ballot question, but that lowering was intercepted and modified by the State Legislature. Reductions were conditioned on state revenues hitting benchmarks established by the Legislature, which happened once previously (lowering the rate from 5.3% to the current 5.25% last year). What is that revenue formula? From the State House News Service:

Under the formula, the income tax rate would fall to 5.2 percent on Jan. 1, 2013 if growth in fiscal 2012 inflation-adjusted baseline revenues over fiscal 2011 exceeds 2.5 percent and if, for each consecutive three-month period starting in August and ending in November 2012, there is positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month period in 2011.

According to state finance documents, Pitter in September certified that fiscal 2012 inflation-adjusted baseline revenues grew by 2.77 percent from fiscal 2011, exceeding the initial trigger for the tax cut.

But in a letter dated Thursday, Pitter said that after revenue growth exceeded triggers for two straight months, baseline revenue fell by 1.29 percent for the three-month period ending on Oct. 31, 2012.

Based on the above the income tax rate for Massachusetts residents will hold at 5.25%. The potential cut was worth about $125 million for the Commonwealth.

Beyond this issues state revenues are falling short of the overall budgetary benchmarks, which will force the Governor to make some mid-year budgetary adjustments to reflect the lower revenue numbers. And the Governor and Legislature are due to deal with the funding issues plaguing the transportation system, especially the MBTA, in the next month or so. That transportation review, and the falling revenue numbers, may mean….. (coming in the next post).