IN HIS FINAL budget proposal before leaving office, Gov. Charlie Baker on Wednesday included nearly $700 million worth of tax cuts for Massachusetts residents, setting up a debate over tax policy with the Legislature.
Baker touted his proposals as helping those most in need: seniors, renters, low-income taxpayers, and parents of dependent children.
“This proposal will help working families keep more of their hard earned money to pay for needs like childcare and housing,” Baker said at a State House press conference. “The cost of just about everything is going up and these tax breaks would offset some of those costs for families.”
Yet two of the most expensive proposals would help taxpayers who tend to be wealthier, or at least solidly middle class: proposals to modify the estate tax and lower the tax rate on short-term capital gains. Baker and Secretary of Administration and Finance Michael Heffernan said these fixes are necessary to keep Massachusetts competitive in an environment where remote work makes it easier for people to move away.
Baker said these tax changes “deal with very significant issues that play into our competitiveness position at a time when a lot of people are figuring out that they can live and work practically anywhere.”
The $693 million in tax breaks are included as part of the governor’s $48.5 billion budget proposal, which reflects spending growth of just 0.5 percent compared to the current year. The low number is due primarily to an expected $1.2 billion drop in MassHealth spending as people who got on the program during the pandemic are determined to no longer be eligible. (Under federal law, MassHealth cannot reexamine eligibility during the state of emergency.)
The additional MassHealth money, combined with an estimated 2.7 percent growth in tax revenue, has allowed Baker to both propose a hefty slate of tax cuts and suggest additional investments in state services, including new behavioral health initiatives and more generous housing assistance.
While Baker first announced the tax breaks Tuesday in his State of the Commonwealth address, the budget provides far more detail on what they will look like.
The tax break with the biggest cost to the state – $231 million annually – involves raising the threshold at which the estate tax kicks in from $1 million to $2 million, while only taxing income above that amount.
Experts say Massachusetts is unquestionably an outlier on the estate tax. Only 17 states have estate or inheritance taxes, and only Oregon has a threshold as low as $1 million. With one in ten Massachusetts homes valued at over $1 million, according to the Executive Office for Administration and Finance, that leaves many residents vulnerable to the tax. The graduated tax is also administered in an unusual way, which creates a cliff effect: it applies to the entire value of an estate rather than just the value that exceeds $1 million. So a $999,000 estate would not be taxed, while an estate valued at $1,000,001 would be taxed on the entire amount.
Bills to raise the threshold on the estate tax have been filed in the Legislature by Republicans, and by Democrats from Cape Cod, which has high housing prices.
Baker also wants to tax short-term capital gains at 5 percent, instead of the current 12 percent, saving around 150,000 taxpayers $117 million annually. Short-term capital gains are money from an investment sold within a year – for example, from day trading. Heffernan said around 60,000 of the taxpayers who benefit from it are middle-income taxpayers, and he called the tax rate “markedly uncompetitive.” There is already a higher federal tax rate for short-term capital gains.
The other tax breaks are geared more toward the taxpayers who Baker argues need extra assistance. Baker is proposing doubling existing tax breaks for taxpayers with dependent children, which would save more than 700,000 families a total of $167 million.
Baker wants to raise the income level at which someone does not have to pay taxes, eliminating income taxes for the 230,000 lowest-earning taxpayers (individuals earning less than $12,400, compared to $8,000 today). That would result in a $41 million savings for 234,000 taxpayers.
Baker is also proposing doubling a tax credit for lower-income seniors from $1,170 to $2,340, which would save around 100,000 seniors $60 million. He wants to increase the maximum tax deduction taken by renters from $3,000 to $5,000, saving an estimated 881,000 taxpayers $77 million.
The budget also assumes the state’s charitable deduction will go into effect in 2023. The deduction was passed as part of a 2000 ballot question, and the Legislature has continually delayed implementing it.
The big question is whether there will be any appetite for tax breaks in the Democratic-led Legislature, particularly those affecting higher-worth individuals. The Legislature has generally been more inclined to seek to raise taxes on that group – for example, advancing a constitutional amendment that would impose a surtax on income over $1 million – than lower them.
Baker said similar policies have been introduced in the Legislature on a bipartisan basis. There are pending Democratic-sponsored bills that would increase the rental deduction and enhance tax breaks for seniors and parents with dependent children.
But the politics could be trickier if lawmakers move to change the estate or capital gains taxes.
Speaking Tuesday night before Baker released the details, House Speaker Ron Mariano and Senate President Karen Spilka, both Democrats, said they would review the tax proposal, but both sounded inclined to primarily help populations still struggling to recover from COVID. “We want to make sure the money’s going to the people who deserve it, the people most adversely impacted by the pandemic,” Mariano said.
House and Senate leaders did not immediately respond to requests for comment Wednesday. A spokesperson for Senate Ways and Means Chair Michael Rodrigues said the senator was still reviewing the governor’s proposal.
Marie-Frances Rivera, president of the liberal-leaning Massachusetts Budget and Policy Center, said her organization supports the tax breaks for renters, seniors, and low-income families. But she worried that giving breaks on the estate and capital gains taxes would deny the state money it needs to recover from the pandemic. “The wealthiest individuals in our state shouldn’t be able to enjoy huge windfalls during the pandemic while students, teachers, small business owners, renters, and small landlords wait for relief from this crisis,” Rivera said in a statement.
Typically, capital gains taxes are earned more by the wealthy because they have the most stocks and assets. According to 2019 figures from the Department of Revenue, there were just over 150,000 taxpayers who paid short-term capital gains taxes that year. Of those, 89,500 filers, or 60 percent, were in the top 20 percent of income, and 80 percent of filers were in the top 40 percent in terms of income. Among the lowest-income 20 percent of filers, only 4,000, or 2 percent, had short-term capital gains.
Overall, the budget reflects a state flush with cash. Baker wants to make a one-time $250 million deposit into the state’s pension fund, in addition to the regular payments needed to keep the fund on track to full funding by 2036. He wants to make more low-income seniors eligible for a Medicare savings program, in which the state pays some of their out-of-pocket health care costs.
As residents lost jobs during the pandemic, there has been a huge spike in the need for rental and housing assistance the last couple of years. There was a huge influx of federal money available to help renters, but with those programs ending, Baker is proposing spending more money and providing more generous housing assistance than the state did pre-pandemic, through changes to several state programs. For example, RAFT, a rental assistance program which pre-pandemic was a $20 million program with a maximum benefit of $4,000, would become an $80 million program with a maximum benefit of $7,000, serving 15,000 households annually instead of 5,000.
The state system for addressing mental health has long been unable to keep up with demand, but the problems reached crisis level during COVID, with hundreds of people in emergency rooms daily waiting for psychiatric treatment. Baker is proposing an approximately $115 million investment in new behavioral health initiatives. This includes a 24/7 helpline to provide support and connections to mental health treatment; improved reimbursement rates for outpatient treatment; and more community-based alternatives to emergency rooms, including urgent mental health care facilities and mobile crisis units.
“These investments are aimed to open up the front door and to ease the availability of urgent and outpatient behavioral health services to the residents of the Commonwealth, including appropriate diversion from the acute care hospital system,” Secretary of Health and Human Services Marylou Sudders said in a statement.
The behavioral health changes would be funded partly through a surcharge imposed on insurers. Baker separately wants to increase a surcharge on hospitals, which he would use for a variety of health care-related expenses.
Other notable investments include funding two new police academy classes to train 175 troopers; an increase in funding for substance abuse treatment; expanding funding for foster parents and for a temporary childcare program at DCF; and preparing to vastly scale up the state’s early college and workforce training programs to prepare high schools students for college and work.
As Lt. Gov. Karyn Polito announced at a Friday meeting of the Massachusetts Municipal Association, the budget includes a 2.7 percent increase in local government aid, to $1.2 billion. The Baker administration says this is in line with its promise to increase local aid by the amount tax revenues are projected to increase. But local officials are disappointed the state is not giving them more money to reflect the fact that revenues surged unexpectedly this year.
The budget fully funds the next year of the Student Opportunity Act, the state’s newly revised education funding formula, by increasing Chapter 70 education funding by $485 million, to just under $5.99 billion.
Baker’s budget counts on getting money from both legalizing sports betting and allowing Lottery bettors to use their debit cards – even though neither policy has yet passed the Legislature.
Baker’s budget proposal will now go to the House, and the House and Senate Ways and Means Committees will hold public hearings. The House will vote on its version of the budget in April, and the Senate will follow in May. A conference committee then needs to negotiate a final version of the budget, ideally to be signed into law before fiscal 2023 begins on July 1, 2022.