DOR: Senate tax relief rises to $845M in out years

Sam Doran/State House News Service A senate bill on Beacon Hill

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By Chris Lisinski | State House News Service

The competing House and Senate tax relief proposals might not be quite as far apart, at least in terms of total financial impact, as the public was led to believe.

Senate Democrats said throughout the rollout and approval of their package that it would not increase much beyond a fiscal year 2024 bottom line of nearly $590 million, in contrast to the House-approved bill that would start at a similar figure and rise to nearly $1.1 billion annually as additional tax relief measures are phased in over several years.

But a new analysis produced by the Healey administration's tax experts bucks that narrative, suggesting the total revenue hit to the state under the Senate bill would rise more than 60 percent over the first five years of implementation.

The Department of Revenue estimated the revenue impact of the Senate-approved tax plan at $519 million in fiscal 2024 and $845 million in fiscal 2029, an increase driven largely by expanded credits to encourage housing development.

DOR sent a trio of analyses, acquired by the News Service, to lawmakers negotiating a final tax relief bill after representatives involved requested more information about the Senate plan. In addition to breakdowns of each bill, the revenue department said it is unable to produce a clear financial estimate stemming from a tax-filing change designed to limit avoidance of a new surtax on high earners.

[DOR Analyses: House Tax Relief Bill | Senate Tax Relief Bill | Surtax Filing Reform]

The department pinned the FY24 impact of the House bill at $582 million and its FY29 impact at nearly $1.27 billion, so there is still a sizable dollar-value gap between the measures that remain mired in private talks, not to mention some divergence in the actual policies proposed.

Senate Ways and Means Committee Chairman Sen. Michael Rodrigues said while unveiling his chamber's proposal that its impact would "rise very immaterially in coming years."

"It's going to go up a little bit, but not a lot," he said in a June 8 interview.

A Rodrigues spokesperson declined to comment Monday when asked about DOR's new estimates.

Senators pitched their bill as a balanced approach to relief that would make Massachusetts more competitive with the tax environment in other states while targeting many benefits to the greatest areas of need.

When it rolled out the bill, the Senate Ways and Means Committee said one section would increase the annual authorization for the Low-Income Housing Tax Credit from $40 million to $60 million.

DOR suggested that growth would effectively repeat each year, pushing the maximum credit in the program that incentivizes building rental housing for lower-income families upward to "$100 million in year five and thereafter."

The administration's analysis also said there would be a delayed impact to state revenues from the Senate's plan to expand tax credits through the Housing Development Incentive Program.

In FY24 -- which started July 1 -- the proposal would have a $0 impact, and by FY29, the annual revenue hit would be $25 million, DOR said.

The department added that the Healey administration's new standalone housing secretariat believes existing demand for the incentive program "may not support [an] annual credit amount more than $30 million," which factored into the financial estimates.

Doug Howgate, president of the Massachusetts Taxpayers Foundation think tank, said the escalating credits designed to prime housing development take aim at the lack of affordable housing strangling many Bay Staters.

"This has a significant cost over time, but when you think about our goals for housing production and mitigating costs in those areas, clearly this is something there's a great deal of support for," Howgate said.

At the request of House negotiators, DOR also assessed a provision in the Senate bill that would require any couple who files a joint federal tax return to file a joint state tax return.

Supporters say that change would close a "loophole" in the new 4 percent surtax on personal income above $1 million, which voters approved in November, in which high-earning couples file separate state tax returns to minimize or eliminate what they owe.

The left-leaning Massachusetts Budget and Policy Center previously estimated that strategy could limit surtax revenue by $200 million to $600 million per year.

DOR analysts effectively said they cannot confidently estimate what the actual impact would be.

The "maximum potential revenue impact" of Bay Staters filing separate returns to limit their surtax liability could reach $500 million to $600 million, DOR said. But the department cautioned that number "significantly overstates the likely actual outcome" because of assumptions built into it.

Officials outlined several examples of married couples with different incomes and the various benefits available to them from filing jointly or separately.

"Taxpayer behavior is based on each individual's unique circumstances. While a consistent filing requirement may cause some high-income married couples who are subject to the surtax to file jointly in Massachusetts, we cannot estimate the extent to which that will occur," DOR wrote. "Further, the consistent filing requirement would apply to all taxpayers, not just those who are subject to the surtax, and could have unintended consequences for those filers."

Business groups have opposed the proposed filing language reform, arguing that it would contradict efforts to improve the state's tax climate.

"We have grave concerns over expanding the surtax, certainly, but [the DOR report] also gives some evidence that the taxpayer-to-taxpayer effect is going to be a lot harder to forecast than some people anticipated," Howgate said.

Rodrigues and his House counterpart, Rep. Aaron Michlewitz, are leading the private talks about a compromise tax relief bill as well as closed-door deliberations about an overdue annual state budget for the fiscal year that started July 1.

The underlying tax bills each propose doubling the estate tax threshold from $1 million to $2 million, increasing the Earned Income Tax Credit, and raising the rental deduction cap and senior circuit breaker tax credit cap. They also seek greater child and dependent tax credits, albeit in varying levels.

Negotiators will need to hammer out differences on housing tax credits, a sales tax calculation reform, and a measure backed by the House and Gov. Maura Healey to reduce the state's short-term capital gains tax rate from 12 percent to 5 percent.

House Speaker Ron Mariano appeared to leave the door open to dropping the capital gains reform. Asked by Jon Keller in a WBZ television interview that aired Sunday if that proposal was a dealbreaker in a final package, Mariano replied, "It depends what other things are in the compromise that we reach."

"But I really do think the competitive issue is something we have to deal with, and I was pleased when the governor came in and said some of the same things," Mariano said.

Mariano said he was "a little bit" surprised when the Senate first proposed a tax relief package much smaller than the House's, and he recounted "odd negotiations" last year when the sudden revelation that Massachusetts owed taxpayers nearly $3 billion under a decades-old tax cap law upended prior relief plans.

[Sam Drysdale contributed reporting.]