Gov. Healey’s Tax Plan: Not Enough on Competitiveness
Eileen McAnneny is a Pioneer Senior Fellow in Economic Opportunity
In an effort to make good on her campaign promise of “delivering an affordable, equitable and competitive tax structure for Massachusetts,” Governor Maura Healey on February 28 unveiled her tax package providing almost $850 million annually in tax relief. This package is part of the governor’s FY24 budget filed on March 1. While Gov. Healey’s proposal makes significant strides in addressing affordability and indirectly improves equity, it does little to address the issues of competitiveness.
The tax package has five major components:
- Creation of a Child and Family Tax Credit ($458 million annual cost). A $600 tax credit for each qualifying dependent is created. A qualifying dependent includes children under 13, disabled adults and seniors. This credit is fully refundable, uncapped, and available to all taxpayers regardless of income.
- Increased Senior Circuit Breaker ($117million). Current law enables qualifying seniors to deduct on their income tax return the amount paid in property taxes that exceeds 10 percent of their total annual income, up to a maximum amount of $1,200. This proposal increases the maximum deduction to $2,400 and indexes the amount to inflation.
- Increased Renters’ Deduction ($40 million). Current law allows renters to deduct half the cost of rent for their primary residence up to a maximum amount of $3,000 on their income tax return. This proposal increases the maximum deduction to $4,000.
- Estate Tax Reforms ($167 million). Reforms current estate tax law by establishing a non-refundable tax credit of $182,000 for each estate, the effect of which is to erase tax liability for estates with net taxable value under $3 million and reduce the tax liability for larger estates.
- Short-term Capital Gains Tax Rate Reduction ($117 million, no net budget effect). This proposal reduces the tax rate on short-term (assets held for less than a year) capital gains from 12 percent to 5 percent to align it with the tax rate for ordinary income and long-term capital gains. While this proposal will reduce tax revenue collections by $117 million, because current statutory requirements cap the amount of tax revenue from capital gains used to fund the annual operating budget, this will not reduce budgetary revenues. It will, however, reduce the amount available for deposit into the Stabilization Fund.
Analysis
The proposals outlined above provide varying amounts of relief to discrete groups of taxpayers for daily living expenses, the costs of which in Massachusetts far exceed the national average. If enacted, these measures will assist renters, seniors and families in paying for dependent care, rent and/or property taxes. Doing so, Gov. Healey’s tax package advances her stated goal of addressing affordability, even if the relief is targeted.
There is little in this package, however, to address Massachusetts’ competitiveness. Ostensibly, the estate tax reforms and reduction of the short-term capital gains rate are intended to do that, but they are not bold enough to move the needle.
With respect to the estate tax, Massachusetts is far out of the mainstream in the United States. It is one of only 12 states to impose an estate tax. At $1 million, Massachusetts has the lowest threshold at which the tax kicks in, and the most aggressive application by subjecting the entire amount of the estate to the tax, not just the amount that exceeds $1 million. During the last legislative session, lawmakers on Beacon Hill widely acknowledged how far Massachusetts is out of step with the rest of the nation and introduced proposals to address it. Legislators were unable to get their proposals over the finish line then, and the proposals from the last session are now insufficient to counter the negative effects of the income surtax that was adopted last November.
Gov. Healey’s estate tax proposal is similarly insufficient. Even were Gov. Healey’s reforms to pass in the legislature, Massachusetts would still have the most onerous estate tax in the Northeast. This tax packs a one-two punch for higher wealth households already affected by the income surtax. If Massachusetts wants to mitigate the negative economic consequences of the income surtax and put a halt to the exodus of higher-income households from the state, it should either eliminate the estate tax, as 38 states have done, or, like Connecticut, adopt the federal threshold of $12.3 million.
The proposal to reduce the tax rate on short-term capital gains is a welcome change but is not enough to position Massachusetts more favorably vis-à-vis other states. Only two other states tax short-term capital gains at a higher rate than long-term gains. Thus, this change merely aligns Massachusetts with other states; it does not provide a more advantageous tax treatment of short-term capital gains such that Massachusetts gains a competitive advantage.
A broader approach, providing tax rate relief for all capital gains, however, would entice investments in the Commonwealth while also mitigating the negative impact of the surtax on small businesses, investors, and high-income earners. Reducing the rate on long-term capital gains would improve Massachusetts’ competitive position and should be added to the governor’s tax package.
Affordability and competitiveness are related, but they are not the same thing. Alleviating high costs for residents does not automatically translate into an improved competitive position for businesses. Gov. Healey has introduced a tax package that contains meaningful reforms for targeted taxpayers. As such, it is a good first step. But if we are to build a Massachusetts economy for the future, as the governor espoused in her inaugural address, an important next step will be to build upon this effort by introducing tax relief targeted to employers in order to make Massachusetts a more affordable place to conduct business.
