House $3.8B spending bill includes $500M In tax relief

Photo | Chris Lisinski, State House News Service House Speaker Ron Mariano

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By Chris Lisinski | State House News Service

The House on Monday advanced an economic development bill that invests $350 million in hospitals, $100 million in port development, $175 million in housing development and more than $3 billion in other areas, all while rolling out a series of one-time tax rebates and permanent tax breaks.

Flanked by nearly two dozen House Democrats, Speaker Ronald Mariano rolled out the $3.8 billion bill (H 5007) that links several of the session's most prominent topics -- tax relief, a massive budget surplus and pandemic recovery -- into a single vehicle with less than three weeks remaining to get legislation over the finish line.

The measure embraces several of the tax policy proposals Republican Gov. Charlie Baker has been seeking, as well as aspects of an economic development bill he filed in April (H 4720), such as a $300 million transfer to the unemployment insurance trust fund that would relieve some of the financial pressure businesses face after a surge of COVID-era joblessness.

House Democrats are also proposing $165 million to fill workforce needs in nursing facilities, $100 million to supplement human service provider rates, $100 million to help the Massachusetts Clean Water Trust reduce project costs, and $75 million in grants for hotels that experienced financial losses during the pandemic.

The bill also authorizes permanent tax breaks collectively worth about $500 million per year, and which would not take effect until next year.

"I'm especially proud that as a conservative supermajority on the Supreme Court is unleashing an unprecedented attack on women's rights and public safety, the House's economic development proposal includes tens of millions of dollars to increase access to reproductive care in Massachusetts as well as funding for organizations addressing gun violence," Mariano said.

Altogether, the bill would spend $755 million on health and human services, $550 million on business relief, $510 million on one-time tax rebates, $500 million on environmental infrastructure including port development and state parks upgrades, $175 million on housing production, and $25 million to reduce food insecurity.

Representatives gave initial approval to the bill on Monday, and it could hit the floor for consideration -- and a likely flood of amendments seeking to bulk up the bottom line with local earmarks -- later this week.

The bill would be funded almost evenly from three sources: about $1.26 billion in bonds, $1.275 billion from the still-developing fiscal year 2022 budget surplus, and $1.275 billion in American Rescue Plan Act money.

House Ways and Means Committee Chair Aaron Michlewitz said the administration will have discretion on whether to fund individual spending priorities in the bill from the ARPA pot or the surplus pot, so long as officials do not exceed the cap on either.

On both the surplus and federal funding fronts, the House bill uses a portion of the hefty sums available.

Michlewitz said the bill would leave roughly $1 billion in ARPA funds unobligated, a move that would likely give Baker's successor a say in how to carve up the last batch of federal pandemic relief. That contrasts from the governor's original bill, which would have spent down the full $2.3 billion in remaining ARPA aid.

The Department of Revenue has not yet reported the June tax haul that will cap off fiscal year 2022, and early estimates indicate the surplus may exceed $3 billion, but bill does not allocate all of it.

"I think we're going to be carrying it over, potentially into next year," Michlewitz said of lawmakers' plans for spending the rest of the surplus. "We don't know what the economic climate is going to be going forward. We want to make sure we're keeping ourselves in solid shape beyond FY23."

Mariano noted state government is not exempt from high inflation.

"We're in a 10 percent inflation rate," Mariano said. "That 10 percent inflation rate affects everything that we buy and do here in the commonwealth, not to mention the fact that it decreases our rainy day spending power by 10 percent. So we're not going to rush to get this money out the door."

The latest Consumer Price Index estimated the cost of all items rose 8.6 percent from May 2021 to May 2022.

Baker signed a $4 billion federal aid and surplus spending bill in December. Through the end of June, according to Michlewitz, only about 40 percent of those dollars had actually been spent.

"Rather than pouring more money into programs that haven't gotten even off the ground yet, we have tried to focus on other areas (where) these critical dollars can be spent in a timely and efficient manner," Michlewitz said.

The House bill calls for roughly $1 billion in combined tax relief. About half of that would come in the form of one-time rebates for more than 2 million middle-income taxpayers that top Democrats outlined last week, while the other half represents tax reforms that would take effect in 2023 and would not count toward the bill's bottom line.

Asked to respond to critics who call the package a "pre-election gimmick," Mariano replied, "It costs a billion dollars. That's not a gimmick. That's a pretty significant revenue decline."

Several of the tax changes, which legislative leaders signaled earlier on Monday morning, target similar areas as Baker's bill filed in January. Democrats spiked the governor's push to reform the short-term capital gains tax rate, but embraced his push to double the estate tax threshold to $2 million and eliminate a so-called "cliff."

Under current law, if an estate is worth $1 million or more, the entire value gets taxed -- in other words, if an estate is valued at $1,000,001, a decedent's personal representative must pay taxes on all $1,000,001, not just the $1 above the threshold. The return and payment are due nine months after a person dies, and if a Bay Stater does not appoint a qualified personal representative before their death, whoever is in "actual or constructive possession" of their property must pay the tax if its value surpasses the threshold.

The House bill would increase the trigger to $2 million and impose the tax only to the amount above that amount, so an estate worth $2,000,001 would only face the estate tax on the single dollar. It would also impose a higher tax rate of 17 percent on estates over $5 million, an increase over existing law that places a 16 percent rate on estates valued at $4 million and above.

Several of the tax changes, which legislative leaders signaled earlier on Monday morning, target similar areas as Baker's bill filed in January. Democrats spiked the governor's push to reform the short-term capital gains tax rate, but embraced his call to double the estate tax threshold to $2 million and eliminate a so-called "cliff" by applying the tax only to the portion of an estate's value above $2 million and not to the entire value once the tax kicks in. They also called for imposing a higher tax rate of 17 percent on estates over $5 million.

Those moves would collectively cut into state revenues by about $207 million per year, House Democrats estimated, more than any other individual tax change.

Evan Horowitz, executive director of the Tufts Center for State Policy Analysis, said he did not expect the estate tax changes to represent the biggest chunk.

"It surprises me that the largest share of the tax cut package goes to fixing the estate tax," Horowitz said. "It's true that the estate tax is broken -- and needs a fix -- but there are ways to do this without giving the lion's share of benefits to the wealthiest folks in Massachusetts."

Other tax breaks in the House bill include an increase in the child or dependent care credit to $310 per child and elimination of the child cap (700,000+ families affected, $130 million annual cost); an increase in the state earned income tax credit from 30 percent of the federal credit to 40 percent of the federal credit (396,000 taxpayers affected, $91.5 million annual cost); an increase in the senior circuit breaker tax credit to $1,755 (100,000+ taxpayers affected, $60 million annual cost); and an increase the rental deduction cap from $3,000 to $4,000 (881,000 taxpayers affected, $35 million annual cost).

All of those reforms would be permanent with no sunset date.

The House bill also calls for a study of selling the Hynes Convention Center, snubbing Baker's latest push to authorize its sale and use the proceeds to fund affordable housing and neighborhood investments in the Back Bay area.

House and Senate Democrats jointly announced several aspects of the legislation before the full bill emerged Monday, including the tax rebates and framework for other tax code changes.

It's less clear, however, how closely the two branches will align on other spending in the economic development package.

"I think the framework is pretty much very similar between us and maybe what the Senate's going to release when they do their own economic development bill, but there are some details within those buckets, per se, that we have to iron out," Michlewitz said. "We knew we had a certain amount of time to try to pre-negotiate this, but we have to get moving on this if we're going to try to finish this before the end of the session."