Tax debate turning on population concerns

For a Revenue Committee hearing, there was relatively little in-depth talk Tuesday about the nitty-gritty details of Gov. Maura Healey's tax package.

To some extent, that was the governor's plan. Facing skeptical members of her own party, progressive groups worried that her plan undermines the message of the income surtax for high earners that they successfully pushed last year and legislative leaders who have their own tax policy priorities, Healey attempted to put a human face on the centerpiece of her first real legislative push as governor.

"We just wanted to take some time this morning to tell you a little bit, not so much the 'what,' but about the 'who' behind this proposal," Healey told the committee as it formally restarted the tax relief and reform discussion about eight months after Democrats sank their own relief proposal and Gov. Charlie Baker's larger package last summer.

Healey's tax package (H 42) combines a new $600-per-dependent tax credit for parents and caregivers with relief for renters and seniors, slashes the short-term capital gains tax rate from 12 percent to 5 percent, and would triple the threshold at which the estate tax kicks in to $3 million.

To explain what the proposal would mean to them, Healey and Lt. Gov. Kim Driscoll brought along three people: Rosario Ubiera-Minaya, the director of Raw Art Works in Lynn, takes care of her 89-year-old father and said the $600 dependent tax credit would help with unexpected expenses like the ambulance trip he had to take Monday night after nearly choking; Salem senior citizen Kathy Winn said she worries that she will hit the $1 million estate tax threshold given the increases in property values since she bought a home more than 30 years ago; and Jo Ann Simons, the president and CEO of Northeast Arc, said she has been waiting years for the state to acknowledge what families like hers deal with as they care for loved ones with disabilities in their homes.

Healey said she hears similar stories wherever she goes: "too many people struggling with a high cost of living, unable to pay rent, unable to think about a down payment, unable to afford child care, gas, groceries -- it's such a challenge for so many across our state -- small business owners who can't make it, and many thinking about leaving."

It was those people who the governor said she had in mind when she and her administration put together a tax reform and relief package that would cost the state $986 million on an annualized basis. She said Tuesday that her proposal (H 42) "will help these people and many more, will give families some room to breathe during hard economic times, will help address some systemic inequities that have been holding too many back for too long, and will provide direct relief to those who need it most."

The first to push back against the governor was Sen. Becca Rausch. The Needham Democrat wanted to walk through how "the four biggest cost centers of the proposal" -- the child and dependent tax credit, the rental deduction, the estate tax changes, and the short-term capital gains reforms -- would actually translate into relief for residents.

"So we've got a renting family of four with a teenager and a four-year-old. If they're in the bottom 80 percent -- which, let's be real, is most of us -- per year, that family would see maybe 700 bucks: $600 for the credit for the four-year-old, 50 bucks for the rental deduction if they can take it, and 45 bucks max if they've got that short-term capital gain credit claim as well," Rausch said. "But if the same family falls into the top 1 percent, they're looking at much closer to $8,000 per year, plus the transfer of a $182,000 credit when an estate passes through generational wealth."

Healey responded by saying that she realizes "the numbers may not be as big as you might like in terms of relief for people," but that her plan attempts to balance providing relief for as many people as possible with changes meant to make Massachusetts' tax landscape more competitive with other states.

"I also know, and I've just heard from Rosario, $600 means something per child. For Jo Ann, $600 means something. And I think in this moment, we're trying to look at ways we can have the greatest impact," the governor said. "Last year, there was a lot of discussion about the estate tax. I think there was a general recognition that we need to do something different in this state. We can't be the outlier that we are because too many people leave -- 100,000 people. More people will leave this week, this month. So we need to do something."

Rep. Erika Uyterhoeven of Somerville picked up on Rausch's line of questioning and told the governor that it "doesn't sound equitable to me" that people with large estates and who earn capital gains stand to benefit more than renters, seniors and families under Healey's plan.

Uyterhoeven said she sees the nearly $1 billion annual cost of Healey's tax proposal effectively washing out the $1 billion in revenue the state expects to get next fiscal year from the new surtax on income above $1 million, which Healey supported. She asked the governor for her thoughts on how lawmakers should go about squaring those two things without cutting services.

"It's interesting. I don't really think of it that way. I don't think it as we're taking a billion dollars away. It's a $750 million tax relief proposal. Two-thirds of that is going to help the Jo Anns and the Rosarios of the world, and the seniors out there, who are really feeling the crunch," Healey said. "So two-thirds of it is helping those I would submit more vulnerable populations and, I think, in an importantly equitable way."

Healey's proposal won praise from some members of the Revenue Committee on Tuesday as well. Rep. Jeff Turco, a Winthrop Democrat, said the governor had proposed "a working class, working guy and gal's budget and a working guy and gal's tax proposal."

"And I just wanted to thank you on behalf of the people that I represent, because there's a lot of people that are crying out for somebody to be a voice of reason in this economic craziness that we see with inflation," Turco said. "I got more calls from my district about the increased cost of electricity than I did about the parking meters on Revere Beach when that first happened. I mean it's shocking how people are hurting and your budget speaks to them."

Rep. Michael Soter, a Bellingham Republican, told Healey he is on board with her estate tax plan, noting that senior citizens make up 62 percent of his district and often worry about what the $1 million estate tax threshold means for them or their heirs.

Sen. Lydia Edwards of East Boston pitched a different way of addressing Massachusetts' estate tax to Healey on Tuesday. Instead of raising the threshold to $3 million right way, Edwards suggested the governor think about increasing the threshold in gradual steps over five or 10 years.

"If we're going to center equity, then I would like to see all of the incredible proposals -- the rents increase, the senior circuit breaker, student loans, so on and so forth -- I want to see them doubled if not tripled," Edwards said. "And when it comes to the estate tax, I think it's gone too far."

After the hearing, Healey told reporters that her administration would "take back" Edwards' comments and would stay in touch with the committee. But she did not suggest that she'd be on board with the idea of raising the estate tax threshold incrementally.

"I think we stand by our proposal in terms of what we think makes sense for this time when it comes to the estate tax," the governor said.

The fine details of the governor's tax package are nearly certain to change, probably a few times, as it moves along through the committee process and if it reaches either branch of the Legislature for a vote. Rep. David Linsky said Healey gave lawmakers a good "menu" of options and thanked her Tuesday "for starting the conversation."

To a large extent, the fate of Healey's tax proposal will be determined by the House and particularly House Speaker Ronald Mariano since legislation changing state tax policy has to start in the House.

During Sunday's episode of WCVB-TV's "On The Record," Mariano said that he and Ways and Means Chairman Aaron Michlewitz have been discussing "alternatives" to Healey's tax plan as they prepare the House's fiscal year 2024 budget proposal for release and debate next month.

The speaker said there would be "some opportunity to go back and reevaluate the package that we put together" last session, before he and Senate President Karen Spilka walked away from their agreed-to proposal for tax reforms like adjusting the estate tax threshold and relief measures for millions of residents. Mariano indicated that there is still an appetite in the House to address the estate tax.

"That was one that was in early discussions from the very beginning. So there's a likelihood that something could happen there," he said on the TV program.

The speaker added, "So those things that we've already analyzed, we're gonna go back and look at what our numbers are now and how we're doing as opposed to the benchmarks. If we're hitting the benchmarks, you know, we're confident we can we could go forward."

After adjusting for an elective pass-through entity excise tax, state tax collections through February were $1.058 billion or 4.7 percent more than collections in the same period of fiscal 2022 and $572 million or 2.5 percent higher than the year-to-date benchmark. Last week, after the Senate sent Healey a $1.1 billion package of spending and bonding authorizations, Senate Ways and Means Chairman Michael Rodrigues estimated that the state had "about $600 million in available surplus with a little over the quarter of the fiscal year still yet to go."

Mariano could also pursue tax policy changes apart from what the governor has proposed and from what the Legislature had agreed to last year. A year ago, the speaker told reporters after a speech to the Greater Boston Chamber of Commerce that he had his eyes on other new revenue sources.

"There's a whole gig economy issue and how we deal with some of those things, I think that's ripe for some examination. I think we'd be silly to just give them a free pass without looking at it," Mariano said in May.

Spilka has been far more upfront about her support for "permanent progressive tax relief" and said last month that she was "very pleased" with Healey's overall package, noting that there are "a lot of pieces in the governor's proposal that are close to what the Senate endorsed." The Senate president indicated a particular interest in the child care and dependent tax credit.

The State House hearing room that hosted Tuesday's tax summit was packed with representatives from advocacy groups hoping to weigh in.

Doug Howgate, president of the Massachusetts Taxpayers Foundation, supported the governor's bill. In prepared testimony, he told Revenue Committee members that while the state's economic and policy landscape has changed in three key ways since the House and Senate walked away from last summer's proposal, "each of those changes calls for more significant and impactful tax relief than the proposals from 2022."

First, Howgate said, cost pressures on Bay Staters have only gotten worse. Consumer costs grew by 4.7 percent in 2021 but 9 percent in 2022. Plus, people are already leaving Massachusetts for lower-tax states and the adoption of a new income surtax could accelerate that trend. And, Howgate said, the state's financial position has gone from "strong to much stronger."

"Any of these factors alone could jumpstart a conversation on tax reductions; combined, they present a compelling case for tax changes that provide cost relief to residents, address negative tax outliers, and send a signal to people and businesses considering Massachusetts as a place to relocate and grow," Howgate planned to say, according to his prepared testimony. "Governor Healey's bill is not a silver bullet for these challenges, but it builds a foundation for policies designed to help Massachusetts compete for residents, jobs and investment."

Members of the Raise Up Massachusetts, the coalition behind the income surtax amendment that voters approved, opposed Healey's bill.

"Right now, the biggest challenge for my business -- and most other businesses in the state -- is finding and keeping employees. The high cost of living for working people in Massachusetts is hurting small businesses and harming our entire economy," Gerly Adrien, owner of Tipping Cow Ice Cream in Somerville and Boston, said, testifying on behalf of the coalition. "Giving hundreds of millions of dollars in tax breaks to wealthy estates and day traders does nothing to help small businesses like mine."

Raise Up instead supports a bill (H 2960 / S 1784) filed by Uyterhoeven and Sen. Julian Cyr that would raise the estate tax threshold to $2 million.

Ahead of Tuesday's hearing, the Massachusetts Society of Certified Public Accountants released results of a survey it conducted of CPAs, which found that 82 percent of CPAs said they have Massachusetts clients who earn more than $1 million a year and have expressed interest in leaving the Bay State in the next year. In cases in which clients said they might flee the state, 61 percent cited Massachusetts tax policy as the primary reason.

Paul Craney, spokesman for the Massachusetts Fiscal Alliance, said that Healey's proposals are "half measures at best and not nearly bold enough to get us to a position where we will be competitive" with other states.

Jim Rooney, president and CEO of the Greater Boston Chamber of Commerce, said his organization supports Healey's plan but also suggested ways that lawmakers could make it even more enticing to the chamber's membership.

"By reforming the estate tax and reducing the short-term capital gains tax rate, the legislation addresses two policies where Massachusetts is a negative outlier for employers and job creators. We urge you to consider increasing the estate tax threshold to $5 million, which experts say is necessary to stem the outflow of residents and revenue," Rooney said. "The chamber has long supported the additional $550 million in reforms that provide relief to residents in the form of an increased renter's deduction, a higher senior circuit breaker tax credit, and a dependent credit."

The Retailers Association of Massachusetts also registered its support for the governor's plan and particularly her proposals around the estate tax and short-term capital gains tax.

"However, we do think that there is more that can be done to deliver tax relief to our consumers and small businesses still struggling to find sure footing in these difficult economic times. One suggested tax policy item that we would urge the Committee to look at when reviewing and amending this bill would be the Small Business Energy Exemption, which allows qualifying small businesses to claim an exemption from the sales tax for purchases of gas, steam, electricity, or heating fuel," RAM Vice President Bill Rennie said.

Rennie suggested that the Revenue Committee think about removing or increasing the $1 million gross income limitation on that exemption, and raising the employee threshold from five to 50 employees, which he said is "a common small business threshold in our state law."