Landscape shifting again around stalled tax relief talks
Photo | Courtesy of Commonwealth of Massachusetts
Massachusetts State House
Lawmakers have given no indication they are any closer to compromise on the tax relief they promised more than a year ago, and they continue to be buffeted by competing affordability crosswinds.
Beacon Hill received another pair of pitches in the past week, one arguing that slashing taxes is "affordable and sensible" in the current fiscal environment and the other instead urging legislators to be "cautious" amid a series of looming costs.
The Massachusetts Taxpayers Foundation, a business-backed group that has long urged lawmakers to reform the state's tax code, said in a report published Tuesday that the state can absorb the roughly $580 million lawmakers already set aside for relief despite a recent drop in revenues.
"In fact, even though tax collections declined between FY 2022 and FY 2023, total tax collections remain billions ahead of pre-pandemic trends. In the five years prior to the pandemic (FY 2014 to FY 2019), tax collections grew at a rate of 4.9 percent. Since the pandemic, that rate of growth has effectively doubled to 9.7 percent," MTF wrote. "As a result of this change in collection trends, the state has collected $9.7 billion more in tax revenues than would otherwise be expected, and that's before accounting for any additional revenue brought in by the income surtax."
At the same time that tax collections have grown, Beacon Hill has pumped more and more money into major spending initiatives. The fiscal year 2024 state budget Gov. Maura Healey signed last month totals about $56 billion, nearly $13 billion more than the fiscal year 2019 budget former Gov. Charlie Baker signed five years earlier.
The state's tax revenue haul slowed last year after a stretch of record growth, leaving a gap of $39 million to $177 million that the Legislature and Healey administration will need to close, and collections through the first two months of fiscal 2024 are lagging slightly below expectations.
Healey made tax relief a central topic of her winning campaign, and she proposed a package similar to one Baker offered. The House and Senate each advanced their own versions that overlap in many ways with bills that won initial approval last year before Democrats backed away from the promised relief.
MTF pointed out that tax relief has now won approval in each branch twice in the past two years without becoming law.
"Assessing Massachusetts tax policy over a longer time horizon makes the case for action even more apparent. It's been more than twenty years since significant tax relief was passed by the Legislature and signed into law by the Governor," the group wrote. "Over those two decades, there have been targeted efforts to increase the state's match of the federal earned income tax credit, or enhance tax credits that support specific policy goals like the life sciences industry or housing production in Gateways Cities; but there has not been a comprehensive bill to provide tax relief, reduce costs, and increase competitiveness since well before the Great Recession."
Meanwhile, the Raise Up Massachusetts coalition, which successfully campaigned last year for a surtax on high earners to fund education and transportation investments, called on lawmakers to spike approved-but-not-finalized provisions that would reduce the short-term capital gains tax rate, change how sales tax is calculated for multistate businesses, and lower the impact of the estate tax.
In a Sept. 5 letter to all representatives and senators, the group of organized labor and community groups said "there are many reasons to be cautious about the fiscal cost of extending permanent tax relief to the state's wealthiest residents and corporations."
"The national economic environment remains volatile, and state tax collections have already fallen below expectations," members of the coalition wrote. "The Federal Reserve continues to pursue a policy of deliberately slowing down the economy, and Republicans in Congress are threatening to trigger a government shutdown unless they can force deep cuts to the federal budget that would be felt throughout Massachusetts."
House and Senate Democrats who for months have been unable to resolve their competing visions for relief might now be weighing how to reconcile the idea with a shifting economic landscape.
Significant new costs have begun to emerge. Healey has said Massachusetts is spending more than $45 million per month on emergency assistance shelter services, a significantly higher pace than the $325 million annual appropriation in this year's state budget, to assist families amid a period of record demand on the system.
Massachusetts might also need to invest another $800 million in matching funds to unlock the maximum available in federal infrastructure grants, according to an MTF analysis from last week.
Raise Up Massachusetts also wants lawmakers to intervene to tweak the surtax it brought to the ballot last year. As drafted, higher-earning couples can each file a single tax return instead of jointly, which could minimize the amount they owe due to the 4 percent surtax on income above $1 million.
The coalition has described that option as a "loophole" in the law voters approved less than a year ago and warned it could reduce the amount of revenue from the surtax by up to $600 million per year.
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