Gov. Deval Patrick’s budget chief on Tuesday proposed that certain tax credits sunset after five years without legislative reauthorization, offering a blueprint for the state to systematically review its $26 billion tax expenditure budget.
Secretary of Administration and Finance Jay Gonzalez presented a proposal to the Tax Expenditure Commission that called for eight tax credit programs to sunset every five years, while other tax credits that benefit certain industries would undergo a thorough review every five years, and all other credits – such as the sales tax exemption on food and clothing – would be vetted every 10 years.
“I think a lot of this is common sense and this is something we haven’t done at all before,” Gonzalez said after the commission meeting, referring broadly to the need to review and assess the effectiveness of the credit programs built into the tax code over the years by elected officials with specific goals in mind.
The Tax Expenditure Commission is due to issue a report with recommendations for how to manage the state’s disparate tax expenditure programs by the end of April.
Under the proposal presented to the commission on Tuesday, Gonzalez differentiated between “grant-like” tax credits that get doled out to companies by the state on a discretionary basis and those that recipients only have to demonstrate eligibility to claim, like the tax credit aimed at boosting film industry business.
In the first category, Gonzalez recommended that the historic rehabilitation credit, the life science credit, the low-income housing credit, the Economic Development Incentive Program, certified housing development credits, dairy farmer tax credits, and donated land credits be subjected to review and renewal every five years.
The life science credit program, a $25 million annual, competitive award program administered through the Massachusetts Life Sciences Center, was already tagged by the Legislature with a 10-year sunset clause when approved in 2008.
Credit programs such as the film tax credit, which currently sunsets in 2023, and other programs where a taxpayer must only document qualifying activity and costs to claim the credit would be reviewed every five years for effectiveness, under the proposal. All other categories of tax credits, such as sales tax exemptions, would undergo 10-year reviews.
“Predictability should be, in and of itself, an objective, but not at the expense of getting the results we’re trying to get,” Gonzalez said about the proposal. “I don’t think it’s unreasonable to recommend five years. That sounds like a good amount of tine to assess effectiveness and have programs sunset unless the Legislature renews them.”
The commission delayed a vote on the recommendation until next week to consider the proposal, and after a brief discussion also agreed to wait to vote on a separate recommendation from Gonzalez that all credits in the first category of “grant-like” programs have “clawback” provisions allowing the state to recoup its money if a recipient does not meet the clearly defined goals of the program, such as promised job creation.
The panel did adopt a recommendation requiring the state’s Commonwealth Performance, Accountability and Transparency office to report annually to the governor and Legislature on the effectiveness of all tax expenditures.
The office, established by an outside section of the fiscal 2012 budget and overseen by Assistant Secretary of Administration and Finance Matt Gorkowitz, would be directed under the recommendation to develop metrics for assessing the effectiveness of each tax expenditure, as well as an analysis of tax obligations for residents and businesses in Massachusetts as compared to other states.
Any recommendation made by the commission pertaining to sunset provisions or clawbacks would have to be adopted by the Legislature.
Sen. Michael Knapik, a Westfield Republican, said a “more rigorous debate” in the Legislature would likely follow any action taken by the commission, but he said he felt like the panel was moving in the right direction. “I think the recommendations are much improved from what the direction could have been,” he said.
Sen. Katherine Clark of Melrose said she wanted to study the administration’s proposal, but her initial reaction was that she would be more comfortable making a more broad recommendation that tax credits sunset, rather than prescribing a specific timeframe.
Before discussing the recommendations, the panel heard descriptions from the administrators of the Life Sciences Center and the Economic Development Incentive Program about how their programs work, and what type of enforcement mechanisms are in place.
Maureen Flynn, general counsel for the Executive Office of Housing and Economic Development, explained that the EDIP program was updated in 2009 after 16 years to make the application process competitive with a $25 million cap. Previously, applicants who qualified were given money on a first-come-first serve basis with no discretion involved.
Since the 2009 update, the state has approved 87 projects creating 5,000 new jobs and retaining over 16,000 jobs, mostly in manufacturing, helping to leverage $2.7 billion in private investment.
“The advantage of a competitive process is we are really able to look at projects as they come to us and don’t have to say yes,” said Flynn, who added that decisions are now based on need and where the state believes it can get the most economic benefit.
“It’s a great example of what we need to be doing across government,” Gonzalez said.