The state of Massachusetts has varying personal income tax rates for different sources of income. Most long-term capital gains are taxed at a base rate of 5 percent. A ballot initiative has proposed cutting the base rate for nearly all income sources from 5 to 4 percent. In tax year 2026, this would cost the state about $5 billion per year of which $347 million would come from the reduced rate on long-term capital gains.
The vast majority of Massachusetts residents would see almost no change in tax liability, primarily because they do not have taxable long-term capital gains income. However, for the tax units with the highest 1 percent of income, the change would substantially reduce tax liability by an average of $8,345 in 2026. This 1 percent of households would receive about 76 percent of the overall tax cut.
This analysis is based on ITEP’s proprietary microsimulation model, which estimates the federal, state, and local taxes paid by residents of every state at different income levels under current law and alternative tax proposals. The ITEP Tax Microsimulation Model’s structure is similar to models at the federal level maintained by the congressional Joint Committee on Taxation, the U.S. Treasury Department, and the Congressional Budget Office, and at the state level by state agencies and Departments of Revenue. It relies primarily on data from the Internal Revenue Service (IRS) and the U.S. Census Bureau, supplemented with information from a wide range of additional sources.
The estimate presented here accounts for the fact that the level of capital gains realization is sensitive to the tax rate being applied to those gains. This behavioral response to changes in the tax rate is estimated using an equation preferred by the Congressional Research Service (CRS), which takes into account current capital gains tax rates at the state and federal levels. ITEP’s use of the function represents a balance among the range of estimated coefficients found in the credible economic literature reviewed by CRS.
This estimate also accounts for the fact that a reduction in the tax rate applied to most long-term capital gains would not reduce the state tax rate applied to capital gains derived from the sale of collectibles. The most recent IRS data suggest that no more than 0.45 percent of all long-term capital gains are derived from the sale of collectibles.
