Baker signs budget, takes different tack on tax policy
Refuses to delay charitable deduction, backs little-used tax breaks
GOV. CHARLIE BAKER on Friday signed into law a $47.6 billion state budget for fiscal 2022, which began two weeks ago.
While he let most of the budget become law, Baker, who has line-item veto power, had multiple disagreements with lawmakers over tax policy. He vetoed a delay in the implementation of a state tax deduction for charitable giving. He also vetoed lawmakers’ attempts to eliminate two tax credits aimed at specific types of businesses and haggled with them over the details of a new corporate tax benefit.
Baker, a Republican, is a fiscal conservative who generally opposes raising taxes. The decision to veto the charitable tax deduction delay burnishes his credentials as a governor who supports returning money to taxpayers at a time when he is considering running for reelection.
“This deduction was approved by voters 20 years ago and slated to go into effect when state finances allow, and the combination of strong state revenues and serious needs facing non-profits and charitable organizations necessitates this tax deduction’s going into place,” Baker wrote in his signing letter.
The overall budget calls for the state to spend 3.2 percent more than it did last year, with the increase financed largely by a sharp uptick in revenues yielding an extra $4.2 billion.
Massachusetts residents in 2000 voted to institute a state charitable deduction alongside cuts to the state income tax. But when a recession hit the next year, lawmakers delayed the tax rate cuts and the charitable deduction. The income tax rate of 5 percent finally went into effect in 2020, and the charitable deduction was supposed to go into effect in 2021. The Legislature delayed that by a year due to the economic uncertainty created by COVID-19. Then despite higher-than-expected state tax revenues, they tried to postpone it again this year.
The liberal-leaning Massachusetts Budget and Policy Center has questioned whether the charitable deduction should go into effect. In a May 2020 policy brief, the organization said the charitable deduction could cost the state $300 million annually, with most of the benefit going to wealthier taxpayers – since those are the taxpayers who have more money to give to charity. According to the organization, in 2017, 51 percent of the financial benefit from the federal charitable tax deduction in Massachusetts went to filers earning over $1 million, and those filers saw an average tax benefit around $9,500. The organization suggested exploring ways to make a deduction more progressive to benefit lower and middle-income filers more.
The Massachusetts Nonprofit Network – whose members rely on charitable giving – had lobbied in favor of instituting the charitable tax deduction. According to the group, as of 2020, 32 of 43 states with an income tax had a state charitable tax deduction. The network said the benefit would give a vital incentive to residents to contribute more money to charities at a time when organizations desperately need the money to provide services. The organization says a majority of people who give to charity are lower or middle income, and estimates that the deduction would be used by 627,000 low- and middle-income taxpayers annually.
Jim Klocke, CEO of the Massachusetts Nonprofit Network, called this the right time to restore the deduction. “Nonprofits rely significantly on individual donations for their programs and services,” Klocke said in a statement. “The state charitable deduction will enable nonprofits to do more to improve people’s lives and help communities thrive.”
Baker also refused to go along with lawmakers’ decisions to eliminate a medical device user fee tax credit and a harbor maintenance tax credit.
A recent report on the efficacy of all the state’s tax expenditures found these tax credits were not beneficial. The report said the credit for harbor maintenance was claimed by only a small number of companies, and no other state offers a similar credit. The report said the medical device credit was also claimed by a small number of large medical device companies, other states did not have similar credits, and ther credit itself was too small to provide a meaningful incentive for companies.
Baker did agree to eliminate another tax credit for patents related to energy conservation, which he said no taxpayer has ever claimed.
Another section Baker returned to the Legislature was a complex plan to let owners of certain “pass-through” businesses get around a 2017 federal tax change that capped the amount they could deduct from their federal taxes for paying state and local taxes. Essentially, the plan would let those owners pay state taxes on a corporate level, not an individual level, so they could still deduct the cost from their federal taxes. Baker would structure the plan in a way that the business owners would get all the benefit. The Senate supported a tweak that would have the state keep $90 million in revenue, and that version made it into the final budget. So under both plans, the businesses would pay lower federal taxes, but under the Senate plan, the state would collect 5 percent of the benefit.
In returning this section with an amendment, Baker said he believes all the money should be returned to the business owners, and none should be collected by the state. “Where struggling businesses are still emerging from the pandemic and state revenues are strong, taxpayers should be allowed to reap the full benefit of this policy,” he wrote.
Baker did sign into law a legislative compromise on the film tax credit. After years of controversy over whether the credit primarily benefits out-of-state movie producers and actors, lawmakers agreed to make the credit permanent without implementing major reforms to how it is structured. The Massachusetts Production Coalition, which represents film producers, said in a statement that Baker’s signature will preserve thousands of local jobs and economic opportunities. “Massachusetts is now positioned to capture a major portion of the jobs and revenue created by the new productions planned in the post-pandemic entertainment industry,” the coalition said.
Other than the tax changes, Baker vetoed $7.9 million in spending, largely because he had concerns about particular line items. Some years he has vetoed most local earmarks, but given the budget surplus this year, Baker wrote in his filing letter that he let $90 million in earmarks go forward.
Several of the vetoes and amendments were relatively minor – proposing changes to various task forces, finding new funding sources for an item, or eliminating studies he believes are duplicative.
Baker vetoed some reporting requirements and the creation of an ombudsman to address complaints related to shelter housing. He refused to impose conditions on the Department of Correction requiring more prisoners be released onto home confinement.Lawmakers had wanted to lift a cap on the number of hours a government retiree can work while collecting a public pension from 960 hours to 1,200 hours. Baker proposed letting retirees work up to 975 hours, but disagreed with the large jump. “An increase of 240 more hours per year is a significant policy change and moves the Commonwealth and its municipalities closer to a place where employees continue to work near full-time while collecting a pension, without any corresponding changes to improve the current practice,” Baker wrote in his veto message.
Baker vetoed a section that would prevent the Department of Conservation and Recreation from collecting fees or tolls from a road or parking spot without approval from the municipality where it is located. He also vetoed provisions that would have eliminated asset tests for beneficiaries of cash assistance programs for elderly residents and families with children.