Estate tax, housing credits headline $590M state Senate tax relief plan

Senate Democrats on Thursday advanced a long-awaited tax relief package, and both branches and the governor have now all rolled out proposals to cut costs for Massachusetts residents and make the state more competitive.

But the Senate Ways and Means Committee's plan to bring relief to taxpayers is close to half the long-term size size of the measure their House counterparts approved earlier this year.

Between the House's approval of its bill, which over several years would swell to an annual impact of $1.1 billion , and the Senate bill's rollout Thursday, a shortfall in state revenue collections came to light in April, raising concerns about a downward turn in the economy.

"I think we have to look at the timing of this proposal," said Sen. Susan Moran of Falmouth, who co-chairs the Joint Committee on Revenue. "We are coming out of COVID. We are looking at some April numbers, which were lower than the expected amounts, and I think we have to recognize those facts and really focus on relief for families."

Altogether, the tax changes proposed by top Senate Democats (S 2379) carry about a $590 million total annual cost to the state, according to a committee summary of the bill.

Moran said the proposal is focused on "bread and butter" issues to help families. The House bill has a similar projected impact to the fiscal year 2024 budget at about $587 million, but that total would eventually increase to close to $1.1 billion annually as more tax cuts are phased in over the next four years.

The Senate bill by comparison would not increase much beyond FY24. Sen. Michael Rodrigues, who chairs the Senate Ways and Means Committee that drafted the proposal, said the smaller long-term size of the Senate's package was not based on the dip in April revenue numbers.

"No, it's based off of what we feel is a responsible, sustainable tax cut based on what we agreed to last session," Rodrigues told the News Service, referring to tax relief measures that both branches approved in 2022 before legislative leaders backed away from the topic. "We had voted on this last session, and it was built upon with some additions. So it's a number that we feel is responsible and it's significant. I think it's going to be one of the largest tax cuts in the history of the commonwealth."

Rodrigues said the $590 million impact to the state budget may increase slightly over the next few years, "but not a lot."

Compared to the House proposal, the plan from Senate Democrats suggests a more limited child and dependent tax credit and a different approach to reducing the estate tax. It also does not include the House proposals to slash taxes on short-term capital gains and establish single sales factor apportionment in the state.

"The package of tax cuts from the Senate seems to be closer to the right size for what the state can reasonably afford right now," said Evan Horowitz, the executive director of the non-partisan research group Tufts Center for State Policy Analysis. "I think there was a risk with the [House and Gov. Maura Healey's] packages, that they were just going to make the state a little bit too vulnerable to economic downturns by siphoning away some necessary revenue, and this figure, I think, is much closer to a long-term affordable approach."

Focused Competitiveness "On Individuals ... Not Necessarily Corporations"

The Senate Democrats' bill resembles the relief plan senators voted on last year, before the revelation that the state owed $2.9 billion in taxpayer rebates upended the proposals for cuts.

Their plan would increase child and dependent tax credits, rent deductions, the Earned Income Tax Credit, the senior circuit breaker tax credit cap, the annual cap for the Housing Development Incentive Program and the annual authorization of the low-income housing tax credit. The proposal also exempts estates valued under $2 million from the estate tax and seeks to eliminate the "tax cliff," when any estate above the threshold triggers taxes on the entire value rather than just the overage.

Senate leaders omitted two tax changes that were popular with the business community but had earned the scorn of progressives in the state.

It does not include the short-term capital gains tax cuts that both the House and Healey put forward in their plans. Both the House and Healey proposed cutting the state's 12 percent tax rate on short-term capital gains, which are profits realized by selling an asset held for less than a year, to 5 percent, though they recommended different timelines for the change.

Supporters argue that slashing the tax on capital gains will make Massachusetts more competitive, at a time when elected officials fear businesses and people are leaving the state, while progressives have slammed the cuts as an unnecessary "tax break for the rich."

"We focused our competitiveness assistance on individuals and working families, citizens of the commonwealth, not necessarily corporations," Rodrigues said when asked about leaving out cuts that are popular with business owners.

Jim Rooney, president and CEO of the Greater Boston Chamber of Commerce, said he hopes short-term capital gains cuts are included in the final tax relief bill that may emerge after House-Senate negotiations.

"In the context of the competitive environment that we're operating in, and the degree to which the brand of Massachusetts is frayed at this point in terms of business friendliness, I think both symbolically and practically it's an important step for state government to embrace these kind of tax cuts that send a signal that we're going to compete," Rooney said to the News Service.

The Massachusetts Fiscal Alliance said in a statement that the Senate Ways and Means Committee bill is "further watering down the tax reform proposal" and "failing to do enough to make Massachusetts more competitive."

But not all were critical of the omission.

The Raise Up Massachusetts coalition, a network of organized labor and community groups which led the successful campaign to impose a surtax on high earners, voiced strong support for the Senate plan after giving the House and Healey proposals mixed reviews, with criticism aimed at the business-friendly cuts.

"The Senate strikes the right balance of targeted cuts for low-income families and middle-class homeowners, without giving away hundreds of millions of dollars to the ultra-rich and large multi-national corporations. This measured approach takes critical steps to address the affordability and fiscal stability of the commonwealth," the coalition said in a statement. "Ultimately, the Senate's tax proposal addresses issues most important to working families -- like the need for more affordable housing -- while sustaining the critical funding we need to fix our roads and public transit, expand access to childcare, and make our public colleges and universities more affordable."

The Senate Ways and Means Committee bill also excluded a House provision to establish a single sales factor apportionment in Massachusetts. Under a single sales factor formula, the share of a corporation's total profit that a particular state can tax is based solely on the share of the corporation's nationwide sales that occur in the state, according to the Center on Budget and Policy Priorities.

Changing this measure in the tax code would have cost the state $115 million in fiscal year 2024, and then $97 million in subsequent years, according to House estimates.

Rooney said he hopes this policy change will also be under discussion during inter-branch negotiations on the bill.

Horowitz said he believes making this change to the tax code would be more effective to make the state more competitive for businesses than cutting the short-term capital gains tax, but that it was "totally sensible" for Senate leaders to leave it out of their package.

"Switching to single sales factor probably would improve state competitiveness. It does create new incentives for businesses. However, I don't think there's really been quite enough study of and preparation for a change like that. It would be a big change in the tax code and it's something that probably we should have more hearings about," Horowitz said.

The Senate's version of the estate tax reform, also controversial with progressives, carries a total cost of $185 million to the state. It aligns with the House's proposal to double the threshold at which the estate tax kicks in, from $1 million to $2 million, and seeks to eliminate the so-called cliff effect, by allowing a uniform credit of $99,600.

The House took a slightly different approach to try to eliminate the cliff effect, instead only taxing the value of an estate that exceeds $2 million, and not the entire estate as law currently requires. This approach carries a larger price tag for state coffers, likely costing an estimated $231 million.

Housing and Child Tax Credits

Stakeholders and interest groups across the political spectrum weighed in Thursday, many devoting praise to the housing provisions in the Senate proposal.

The plan would increase the statewide cap for the Housing Development Incentive Program, a program geared toward creating market-rate housing in lower-income cities, by $20 million.

The Senate Ways and Means Committee proposes increasing the cap from $10 million to $57 million next fiscal year, and then to $30 million annually in the following years. Healey put forward a similar increase to the HDIP program in her tax bill, but the House did not support the idea.

While the state stares down the barrel of a housing shortage that has helped push prices to record levels, the Healey administration said the major boost in the tax credit would encourage much-needed production.

The HDIP program, created by lawmakers and former Gov. Deval Patrick in 2010, provides both state tax credits and a local-option real estate tax exemption to developers who construct or substantially rehabilitate housing in so-called Gateway Cities with populations between 35,000 and 250,000 that have below state average median household incomes and rates of educational attainment.

But the program has also received some criticism. A Massachusetts Law Reform Institute research report says the HDIP dollars are disproportionately concentrated in a few "hot markets" with rents unaffordable for lower-income families.

The Senate's tax reform proposal would also increase the annual authorization for the state's low-income housing tax credit from $40 million to $60 million. The credit is intended to promote the building and rehabilitation of affordable rental housing.

This tax proposal is unique to the Senate's plan, according to a Massachusetts Taxpayers Foundation analysis of the plan.

"The one area where Massachusetts is really falling behind in competitiveness because of affordability is housing, which is why we chose to -- in addition to what we did, and agreed upon last session -- we did the HDIP, Housing Development Incentive Program increase, and low-income housing tax credit," Rodrigues said.

Senate Democrats also included a proposal to allow cities and towns to adopt a local property tax exemption for real estate rented by a person whose income is less than 130 percent of area median income.

"The only good solution to the housing crisis in Massachusetts is to try to do a lot of different things. It's a big, complicated problem," Horowitz said. "So do I think that the changes to the low-income housing tax credit, along with some of the other changes in this, are in themselves sufficient to make a difference to affordability statewide? No. But do they contribute to the broader array of solutions, like the zoning changes that we've seen being introduced in towns and more direct support? Yeah, I think they do."

Like the House and Healey put forward, the Senate leaders' plan seeks to simplify child tax credits, by combining the Child Care Expenses Credit with the Dependent Member of Household Credit.

However, while senators recommended increasing how much families receive for each child and removing the cap on the number of eligible children and dependents, their bill wouldn't send as much to families compared to what the governor or the House proposed.

The Senate bill would increase the child and dependent tax credit from $180 to $310 per child, costing the state about $164 million. The House recommended the same increase for fiscal 2024, but in their plan would ramp up the credits going to families to $614 by fiscal 2027. At full implementation after four years, the House program would cost $487 million in annual revenue collections.

Healey, on the other hand, wants to start the $600 tax credits for dependents as early as fiscal 2024.

"We do one year -- we increase it one time to $310 per child or dependent, and we can discuss it again in future time," Rodrigues said.

Changes To Chapter 62F

Representatives included a provision in their tax bill that would alter the way mandatory tax relief must be paid under the tax cap law known as Chapter 62F.

When the state's remarkable tax collections triggered the voter-approved law last year for the first time since 1987, Beacon Hill paid back the rebates on a proportional basis. Each eligible taxpayer received a refund worth about 13 percent of what they paid Massachusetts in personal income tax in 2021, which means the state's wealthiest residents got thousands of dollars back and many lower-income Bay Staters received less than $100.

The bill House Democrats crafted would keep Chapter 62F in place but require the rebates to be divided evenly among all eligible taxpayers. Revenue Committee Co-chair Rep. Mark Cusack said that would ensure "everyone in the commonwealth will share equally in our economic success."

Cusack's Senate counterpart does not agree that the tax relief bill is the right vehicle for these changes.

"I don't think this is the time to make a change in a process that only -- it's only been used once since its existence, as far as I know," Moran said.

Asked why the Senate Ways and Means Committee did not consider the same approach as the House to change the way 62F checks are distributed, Rodrigues said "it never occurred to us to do that."

"This isn't a 62F bill, this is a taxpayer relief bill. So we focused on what would benefit the taxpayers of the commonwealth," Rodrigues said.

Senate Democrats did propose, however, a new policy requiring that the comptroller report the net state tax revenue collections to the Legislature every month, including an estimate of if and when revenues may exceed the allowable state tax revenue threshold under 62F, according to the MTF analysis. Legislative leaders appeared to be caught off guard by the law's reemergence last summer, when revenue collections for the year had effectively wrapped up.

"I think the real issue with 62F is there was a window for addressing the problems with that law, and it is mostly closed," Horowitz said. "It happened, we gave $3 billion back to taxpayers in a very direct but not particularly targeted way, and we are unlikely to trigger that law again, I don't know how long, but for a very long time. I don't think this discussion is even really worth having... it's not likely to make a difference to the way that taxes operate for the foreseeable future."

Some Measures Win Support in Both Branches

Though there are key differences in the two branches' bills, three tax changes appear identicial in both measures.

The House and Senate Democrats agree on a desire to increase the rental dedication cap from $3,000 to $4,000, with a $40 million cost to the state. They both also included doubling the senior circuit breaker tax credit cap, up to $2,400.

Representatives and Senate leaders also agreed on a recommendation to increase the Earned Income Tax Credit from 30 percent to 40 percent of federal credit, though there's a slight discrepancy between how much they believe it will cost. The Senate Ways and Means Committee analysis says it would cost $85 million; the House says $91 million.

Senators have until 5 p.m. Monday to file amendments to the bill ahead of deliberations on Thursday, June 15.

The Senate set aside $575 million in its version of the fiscal year 2024 state budget to account for the impact of future tax relief, while the House approved its tax relief bill days before turning to the budget and factored in $587 million for tax relief.

"For me, the most interesting thing is, is this the beginning of a compromise? Or are the packages too far apart now to allow for ready compromise?" Horowitz said. "I don't know, but I think they do seem far enough apart that easy compromise is going to be challenging. So I wouldn't be surprised if this lingers a lot longer than the budget process."