Senate Tax Package Misses the Mark on Competitiveness

The Senate Ways and Means Committee (SWM) recently released its tax relief package, S.2397 – An Act To Improve The Commonwealth’s Competitiveness, Affordability And Equity, estimated to cost $586 million. It offers relief to low- and moderate-income taxpayers through a plethora of credits to offset the high cost of living, particularly as it relates to housing and transportation.

The SWM bill includes reforms to the estate tax law, mirroring what it proposed last year, though it is less generous than either the governor’s or the House’s proposal. Absent from the bill is a reduction in the tax rate on short-term capital gains and other provisions aimed at stemming the tide of out-migration of high-income earners from Massachusetts. As the most recent IRS data indicates, this out-migration trend has accelerated in recent years.

The SWM’s primary focus is on affordability for various taxpayers. While the bill contains many provisions common to the governor’s and House’s versions, it includes others not contained in either bill.

Major provisions of the bill are outlined below.

Cost of Living Relief:

• Increases the Earned Income Tax Credit from 30 percent to 40 percent of the federal credit. This provision is in the House bill, and therefore likely in the final version, but not in Governor Maura Healey’s proposal.
• Increases the child and dependent tax credit from $180 to $310 per child or dependent and removes the cap on the number of eligible children and dependents.  The Senate credit is smaller than the $600 credit proposed by the governor and the House.
• Adds regional transit passes and bike commuter expenses to the allowable commuter expenses deductible from Part B income. This provision is in Gov. Healey’s tax package, but not included in the House version.
• Allows an individual to deduct the amount of student loan repayment assistance received from their employer during the taxable year. This provision is in Gov. Healey’s tax package, but not included in the House version.

Tax Relief for Housing Costs:

Several provisions target the cost of housing for developers, homeowners, and renters alike with the intention of reducing property taxes, offsetting rent, and otherwise lowering the costs of building and maintaining a home.

• Doubles the senior circuit breaker tax credit cap from $750 to $1,500. This provision is common to all three versions of the tax package, and will most likely be in the final bill.
• Increases the rental deduction cap from $3,000 to $4,000. This provision is also in all three versions of the tax package.
• Substantially increases the Housing Development Incentive Program tax credit annual cap to $57 million in calendar year 2023 and establishes the tax credit annual cap at $30 million (from $10 million) thereafter.
• Raises the annual authorization for the Low-Income Housing Tax Credit from $40 million to $60 million. The governor’s and House bills have no similar provision.
• Allows municipalities to adopt a local property tax exemption for real estate that is rented by a person whose income is less than 130 percent of the area median income. The House and governor’s bills have no such provision.
• Increases the maximum available Title V septic system tax credit from $6,000 to $18,000 and increases the amount claimable per year from $1,500 to $4,000.  The Senate proposal is more generous than the $12,000 cap proposed by Gov. Healey. The House did not include such a provision.
• Similar to the governor’s bill, the Senate proposes a doubling of the tax credit for full lead paint abatement to $3,000 and $1,000 for partial abatement.

Other

• Makes several changes to the Brownfields Redevelopment Fund to increase the availability and size of grants and loans from the fund after extending the credit for an additional five years. It will now sunset in 2028. It also excludes any grant or loan made from the Brownfields Redevelopment Fund that has not been repaid from net response and removal costs.
• Increases statewide cap on the dairy farmer tax credit program from $6 million to $8 million. This provision is also in the governor’s bill but not in the House tax package.
• Expands occupations eligible for the apprenticeship tax credit and doubles the statewide cap on credits to $5 million.This provision is also in the governor’s bill but not in the House tax package.
• Expands the classes of alcohol permitted to be taxed at 3 cents per gallon to include hard ciders and still wine to help local producers by raising the amount of alcohol permitted in such drinks from 6.5 percent to 8.5 percent. This provision is also in the governor’s bill but not in the House tax package.

Provisions Targeting Competitiveness:

• Exempts estates valued under $2 million from the estate tax and eliminates the “tax cliff” by establishing a uniform credit of $99,600 for all estates subject to the estate tax.

Analysis of the Bill

As the outline above highlights, the Senate tax package is heavy on provisions that reduce the tax burden for certain taxpayers, thereby helping those that qualify for the expanded credits and deductions. The bill, however, is light on provisions that will improve the Commonwealth’s competitiveness.

The increase in refundable tax credits and expansion of deductions for those meeting income eligibility requirements shifts more of the overall tax burden onto high-income earners. In what could be a foreshadowing of future tax changes to expand such redistributive policies, the SWM bill requires the Executive Office for Administration and Finance to conduct a study on advancing payments of the child and dependent tax credit to those that qualify.

This increasing reliance on a smaller group of taxpayers to shoulder the burden could prove problematic over time. As recent IRS data indicate, Massachusetts is already losing its high-income earners at an accelerated pace.

At  the same time, the SWM bill’s more narrowly tailored changes to the estate tax are insufficient to materially reduce the onerous burden that Massachusetts imposes relative to other states.  Even with these changes, Massachusetts will be in the minority of states with such a tax, and still have among the lowest exemption thresholds.

Without the short-term capital gains tax rate reduction, the Senate tax package offers little in the way of tax relief for high-income earners to help offset the effects of the income surtax. On a positive note, the SWM bill directs the Department of Revenue to conduct a study on the impact of an elective entity-level tax on pass-through entities to account for implications of the fair share surtax on taxpayers and revenue. An entity-level tax was created as a work around to the federal state and local tax (SALT) deduction limitations, so this study may indicate that senators are considering doing something similar for the income surtax.

In sum, the SWM bill contains many provisions to improve affordability for some taxpayers, many of which are common to the governor’s and/or House tax bills. The SWM tax package, however, does less to improve competitiveness, making it less of a balanced package than the governor’s or House’s proposals.

Eileen McAnneny is Senior Fellow in Economic Opportunity at Pioneer Institute.