Mass. tax reform too little, too late
While the 15 years it took to complete the infamous $24.3 billion Big Dig project seemed like a lifetime, Massachusetts lawmakers managed to let an inexcusable 20 years pass before implementing meaningful new tax reforms to help state taxpayers and small businesses. Though that timeframe is not as dramatic as the 75-year wait to witness Haley’s comet whiz past, Beacon Hill’s overdue tax reform effort unfortunately will move the needle very little toward the goal of making the Commonwealth more competitive.
In the two years it took Massachusetts lawmakers to finally advance their roughly $1 billion tax package, more than half the nation reduced its income tax rates. Starting in 2021, 26 states opted to lower personal income taxes, including our neighbors in Connecticut, which enacted the largest income tax cut in the state’s history. By contrast, Massachusetts was the only state in the nation to raise income tax rates in 2023, with the newly imposed surcharge on income over $1 million.
This negative shift in tax policy overrode any of the state’s tax reform efforts, resulting in Massachusetts experiencing a dramatic slide in national competitiveness rankings. The Tax Foundation noted Massachusetts slid 12 spots from 34th in tax competitiveness, to 46th place. It seems highly unlikely that the modest reforms included in the recent tax package will be enough to counteract that significant loss in competitiveness.
One aspect of the tax package that did prove beneficial for small businesses was a change in the state’s estate tax threshold. In short, when a business owner dies and passes the business to heirs, they face an immediate tax on an estate valued over $1 million. This tax is also levied on properties over $1 million, important to many homeowners seeing the values of their homes skyrocket in the recent real estate market. The tax reform bill doubled the threshold at which the tax is triggered to $2 million and eliminated the so-called cliff effect. However, Massachusetts is one of only 12 states that actually has an estate tax, and of those states we had the lowest exemption in the nation at $1 million. So, this moves Massachusetts from worst to third worst, outpacing Oregon and Rhode Island. Is this change enough to improve the state’s competitiveness against the vast majority of states that do not have this tax or that have far higher thresholds?
There are elements outside of the recent tax package that also determine whether small businesses in the Commonwealth are in a position to compete both nationally and internationally. Massachusetts faces some of the highest unemployment insurance taxes in the nation and is currently repaying $2.7 billion for pandemic-related layoffs. There is also the outstanding issue of another $2.5 billion that the state erroneously charged to the federal UI program that may need to be repaid. The effort to implement a $20 minimum wage adds to small business fears as many employers have already raised compensation to combat labor shortages. Indeed, higher labor expenses could not come at a worse time as businesses deal with inflation and supply chain problems.
Health care affordability is another major issue for small businesses, which experience some of the highest costs in the United States due to our unique merged market. Business owners often report double-digit premium increases, fewer choices, high deductible plans, and more out of pocket expenses for employers and their workers. Lawmakers must address the ever-rising price tag of health insurance for smaller businesses so they too can offer robust benefit packages and attract applicants to open positions.
Legislators should also tackle rising energy prices, or at the very least, stop implementing policies that further drive up costs. Massachusetts has already authorized select communities to ban the use of natural gas in new buildings, limiting the types of fuels businesses can use to power their operations. The state has also acted to ban the sale of internal combustion engine vehicles in the Commonwealth by 2035, which could prove more expensive for small businesses that require vehicles as well as their workers who need to commute to jobs.
To be frank, if the goal is to truly make Massachusetts more competitive and attract new industries while ensuring the existing ones thrive, lawmakers may want to head back to the drawing board. Competitiveness does not happen within a vacuum, and while Massachusetts churned out this recent tax package, other states were cutting broad-based taxes and improving their economic climates. The only question lawmakers should be asking right now is: what taxes can we cut next?