House tax plan builds on Healey approach
Phases in some provisions; adds 2 new elements
HOUSE LEADERS fell in line behind Gov. Maura Healey’s call for tax changes to make the state more affordable and competitive, unveiling legislation on Tuesday that not only mirrors but adds to the governor’s proposal.
The House tax plan includes the five major elements in the governor’s plan, plus two additions – one sought by the business community and the other a benefit for low-to-moderate income residents. One of the proposals copied from Healey’s plan – the elimination of the 12 percent tax on short-term capital gains, leaving only a 5 percent tax on all gains – was rejected by the House last year when former governor Charlie Baker proposed it.
Speaker Ron Mariano said the about-face this year on short-term capital gains came about because of concerns about the economy and the state’s outlier position when it comes to the tax treatment of capital gains. “It wasn’t the message we wanted to send,” he said. “This whole competitiveness issue is real as we face challenges from states like North Carolina on some of the bio stuff.”
Speaking to reporters in the corridor outside his office, Mariano said many of the tax changes are needed to stem the tide of people leaving Massachusetts.
Several of the House tax cuts are phased in over several years, reducing the state’s loss in the early years. Overall, House leaders said the estimated cost of the tax package is $654 million in fiscal 2024, which starts in July, rising to $1.1 billion in the third year. Last year, House leaders refused to give final approval to a tax cut package because of uncertainty about the economy and the impact of a $3 billion tax cap giveback.
Mariano said the phasing in the House tax plan creates a “safe, controllable package” that the state can afford. “Based on what we’ve seen and what the predictions are, I think we’re in a position to handle what we put on the table,” he said.
Reaction to the House tax package followed predictable patterns. Business leaders applauded the package as a “good first step” that recognizes the need to keep business and residents in Massachusetts, while the coalition that pushed through a constitutional amendment imposing a 4 percent tax surcharge on income over $1 million trashed the package as a giveaway of state resources to the wealthy and well-connected.
Here’s a breakdown of the House tax plan and how it compares to the governor’s proposal on the two fronts of affordability and competitiveness:
Affordability – Healey’s proposal would benefit parents and caregivers with dependents, offering a $600 deduction for each dependent with no limit on the number of dependents. The House proposal follows the same general approach, but phases in the deduction over four years, starting at $310 in fiscal 2024, rising to $455 in fiscal 2025, $600 in fiscal 2026, and $614 in fiscal 2027.
Healey’s child and dependent tax reduction was the centerpiece of her tax plan. It would cost the state $458 million in year one. Under the House’s approach, the impact and the cost would be scaled back – to $165 million in year one.
The House proposal mirrors Healey’s proposal in doubling the senior circuit breaker from $1,200 to $2,400 and increasing the maximum rental tax deduction from $3,000 to $4,000.
Competitiveness – The House plan copies the Healey approach in eliminating the tax on short-term capital gains and lowering the estate tax. It differs in that the reduction in the tax on short-term capital gains is phased in over two years and the estate tax cut is applied in a different manner.
The House plan lowers the tax on short-term capital gains from 12 percent to 8 percent in the first year before eliminating it in the second year. The House estate tax proposal raises the threshold where the tax kicks in from $1 million to $2 million and applies the tax only to the amount above $2 million. All estates would be eligible for a $2 million exclusion. Under Healey’s plan, the threshold would be raised to $3 million and a uniform credit of $182,000 would be provided to all estates.
House officials said the difference between their plan and Healey’s plan is negligible, but analysts say the cost of Healey’s estate tax proposal would be $275 million a year compared to $231 million under the House plan.
The House plan includes a new proposal to increase the state’s competitiveness by changing the way Massachusetts businesses that operate in more than one state are taxed. Currently, the companies pay corporate excise taxes based on their share of sales, payroll, and property in Massachusetts. The House proposal, which would bring the state in line with most other states, would assess the tax based on sales only. The provision would take effect in fiscal 2025 and cost the state $115 million a year.
Tax cap changes: House leaders were blindsided last year by an obscure 1986 law passed by voters that triggered a tax cap and required refunds totaling $3 billion. The money was refunded based on how much the taxpayer paid in taxes, so those who paid more in taxes received more back. House leaders want to change that so that every taxpayer receives an equal amount no matter how much or how little they paid in taxes.Mariano said the tax cap giveback was triggered because the economy performed well. He said all taxpayers contributed to the strong economic performance, so all should be rewarded. “We wanted everyone to share in that success,” he said.
Paul Craney of the conservative Massachusetts Fiscal Alliance issued a statement basically telling Mariano and the House to keep their hands off the voter-approved tax cap law. “It’s a trojan horse to eliminate one of the few protections taxpayers have from Beacon Hill taxing and spending,” he said in a statement.