A tax relief bill — at last
It took nearly two years of legislative wrangling, but for the first time in more than 20 years, Massachusetts taxpayers can expect to hang on to a little more of what they’ve earned and businesses can expect a few breaks aimed at making the state more competitive. The process wasn’t always pretty — this week’s exercise in collective backslapping notwithstanding — and a couple of ill-advised policy changes thrown into the mix merit a gubernatorial line-item veto. Still, a $1 billion tax relief bill is something to celebrate.
Tax cut legislation — initially filed by Governor Charlie Baker before his term ended and then by Governor Maura Healey this January, fulfilling her campaign pledge — was always a combination of targeted tax breaks for working families and low-income residents and tax reforms aimed at ending the state’s outlier status on the estate tax, taxation of short-term capital gains, and the single sales factor applied to business taxes. And this final version has succeed in accomplishing that.
The bill now on the governor’s desk increases the child and dependent care deduction, eventually raising the deduction to $440 per dependent, and eliminates the cap on eligible dependents, making it, lawmakers say, the most generous in the nation and one that will benefit 565,000 Massachusetts families. It also increases the earned income tax credit, the senior circuit breaker for low-income home owners, and the rental deduction for low-income renters.
The bill makes a one-time increase in the Housing Development Incentive Program from $10 million to
$57 million this year and $30 million in subsequent years, intended to spur some $4 billion in private development in Gateway Cities. Lawmakers say the money is expected to create some 12,500 new homes in those communities.
The state’s lowest-in-the-nation threshold for the estate tax (Massachusetts is one of only 12 states that actually levy an estate tax) was increased from $1 million to $2 million via a $99,000 tax credit. Lawmakers made a start — but only a start — on lowering the tax on shortterm capital gains from 12 percent to 8.5 percent. Healey wanted it lowered to the same 5 percent as regular income — and the House earlier proposed to do that over three years. Given that Massachusetts is one of only three states that tax short-term gains more than regular income, this is an issue that should be revisited next year.
Reform of the single sales factor — the way the state apportions business taxes — will put Massachusetts in line with 39 other states. And that too will help make it more competitive.
But lawmakers went astray by venturing into policy areas with the potential to invite a constitutional challenge.
The bill includes an effort to close what some in the Legislature now insist is a “loophole” in the recently enacted millionaires tax that allows Massachusetts taxpayers to file separately if a joint filing would tip them into “millionaire” status, even if they file jointly at the federal level. That, of course, wasn’t the way the ballot question on the 4 percent surtax on high earners was pitched to voters. But beyond the disingenuousness of Massachusetts Fair Share’s approach is the very real question of whether a state can force spouses to file a joint tax return. The Massachusetts High Technology Council called the provision “troubling.”
But the council had even harsher words for the legislative effort to change any future rebates to taxpayers under a little-used voter-approved tax revenue growth measure known as 62F. The rebate law has only kicked in twice since it was passed in 1986. But last year’s $3 billion in rebates caused a huge legislative kerfuffle. The rebates were remitted to taxpayers based on how much they paid in taxes. Now lawmakers want those rebates paid in equal amounts to taxpayers regardless of how much they paid in taxes — and that looks an awful lot like a back door to a graduated income tax, something expressly prohibited by the state constitution.
In a memo prepared for the High Technology Council last May, when this idea first raised its ugly head, a lawyer at Goodwin Procter advised that “the proposed amendment would result in dramatically different effective tax rates for taxpayers at different income levels” and “would violate Article 44’s uniformity requirement.”
The House speaker, blindsided by last year’s rebates and clearly still smarting from the experience, ought not to be allowed to attempt an end run around a voterpassed law and the constitution.
Healey should save the state the time and effort of the inevitable legal challenge both of these provisions will touch off and use her veto pen on both attempts at circumventing voter-approved laws. Surely that won’t mar the equally inevitable celebration over a tax package long in the making and much needed by the people and businesses truly in need of a break.