Senate tax plan has different take on competitiveness

THE MASSACHUSETTS SENATE is taking a different tack on tax reform than the House or Gov. Maura Healey, going with a smaller overall package and a slightly different philosophy on competitiveness.

In a proposal released on Thursday, Senate budget writers borrowed elements from the House and Healey plans, including tax breaks for renters and families, a big boost for a market-rate housing program, and a reduction in the estate tax. But the Senate plan doesn’t touch the 12 percent tax on short-term capital gains, a provision in the tax code that was scratched by both Healey and the House.

Senate leaders said their roughly $590 million tax package – nearly half the size of the $1.1 billion proposal released by the House two weeks ago – reflects a commitment to keeping the state competitive, not through tax breaks for wealthy investors but by targeting relief for individuals and working families. 

Sen. Michael Rodrigues of Westport, the chair of the Senate Ways and Means Committee, evinced some skepticism that Massachusetts should prioritize stemming a supposed outflow of wealthy residents anxious about high tax rates.

“Housing is unaffordable,” Rodrigues said of the current situation in Massachusetts. “It’s getting too hard to afford to live here and it’s getting too hard to afford to die here.”

To the latter end, the Senate’s version of the estate tax matches the House’s plan in excluding estates under $2 million from the tax, doubling the current threshold. To eliminate the “cliff effect,” where the tax kicks in just one dollar over the threshold, the proposal would allow a uniform credit of $99,600. This estate tax change would cost the state about $185 million. Healey’s tax plan would raise the threshold to $3 million. 

Like the House and Healey, the Senate plan raises the senior circuit breaker tax credit – for seniors who rent or own in the state – from $1,200 to $2,400, as well as up the rental deduction from $3,000 to $4,000. 

Provisions aimed at low-income residents include a boost in the earned income tax credit (from 30 percent to 40 percent of the federal credit amount) and raising the low-income housing tax credit annual authorization from $40 million to $60 million. But some of the cost savings come from adjustments to programs like child and dependent care, allowing $310 per dependent, while the House and Healey proposed a $600 cap.

The Senate and the Healey administration are marching in lockstep on raising the annual cap for the Housing Development Incentive Program (HDIP), a proposal designed to boost market-rate development in mid-sized urban centers known as Gateway Cities. The Senate would increase the statewide cap for the program from $10 million to $57 million for one cycle, higher even than Healey’s $50 million one-time pitch, and then keep the cap at $30 million annually. 

The House passed on HDIP in its tax break package, amid some disagreement about the program’s purpose and effectiveness. The program, which is supported by the policy arm of MassINC, CommonWealth’s parent company, is extremely popular with Gateway City mayors, Rodrigues said, and the $57 million represents a “backlog of development waiting to start putting shovels in the ground and building housing units” when the HDIP money becomes available.

Several items included in the House’s budget, likely to be points of disagreement when they have to be reconciled by both chambers, garnered little to no discussion, Rodrigues said. 

“The housing provisions of the Senate’s proposal are a strength,” said Doug Howgate, president of the business-backed Massachusetts Taxpayers Foundation, in a statement. “However, its exclusion of capital gains tax reform and more limited estate tax and child and dependent tax credit relief undercut our collective ability to meet two key goals: promote Massachusetts’ competitiveness and address high costs of living.”

In a statement, the Massachusetts Society of Certified Public Accountants echoed these sentiments. 

“We believe that not addressing the short-term capital gains rate, as well as other tax policies, poses a significant threat to our future economic growth and prosperity,” the organization said.

The capital gains and estate tax changes have been a sticking point for progressives, who argue that they are handouts to the already-well-off. 

Jim Rooney, president and CEO of the Greater Boston Chamber of Commerce, was generally supportive in a statement. “[I]t is encouraging that all three branches are aligned on the substantive value – for competitiveness, affordability, and equity – of tax relief,” he said. The Senate’s tax relief plan is “a crucial step forward, and policymakers must continue the work to make sure that Massachusetts is not a negative outlier for employers and job creators compared to other states,” he said.

Thursday’s proposal dropped just days after news broke of $2.5 billion in state unemployment payouts mistakenly distributed from a federal pot of money, noted Phineas Baxandall, policy director of the left-leaning Massachusetts Budget & Policy Center, on Thursday afternoon. “That changes the picture of our potential revenue needs,” he said.

The Senate tax plan did not mess around with the formulation or disbursement of 62F funds. The obscure tax law took Beacon Hill by surprise last year when high state revenues tripped a 40-year-old provision requiring the state to return excess revenue to taxpayers. In the House’s tax plan, lawmakers propose returning revenue in equal amounts, regardless of the amount paid in income taxes, drawing the ire of conservatives.

Legislators will have until the end of Monday to submit amendments to the tax plan before it heads to the Senate floor for debate later this month.