GOV. CHARLIE BAKER told lawmakers on Tuesday that Massachusetts can easily afford his package of $700 million in tax cuts, and the state needs some of the changes benefitting higher-income taxpayers to prevent them from moving elsewhere.
“Not only can we afford this tax relief proposal, we believe it’s time to give Massachusetts families back some of the tax revenue that they created through their hard work,” Baker told the Legislature’s Revenue Committee at a hybrid hearing held in person and virtually on the first day the State House was open in nearly two years.
The tax relief package in some sense pits a Republican governor against a Democrat-controlled Legislature whose leaders to date have not made reducing taxes a high priority. During the hearing, Democratic lawmakers focused most of their attention on the governor’s proposed reductions in the estate tax and the income tax on short-term capital gains — two taxes that benefit wealthier individuals. They suggested the money for those tax breaks could be better spent on reducing taxes paid by lower-income taxpayers.
The Baker tax package includes several breaks for lower income residents, including raising the level at which people are required to pay taxes, doubling the maximum allowed circuit breaker tax credit for seniors, increasing the cap on the rental tax deduction from $3,000 to $5,000, and doubling the dependent care tax credit to $480 for one individual and to $960 for two or more.
Sen. Adam Hinds, a Democrat who is mounting a run for lieutenant governor, indicated the rental tax deduction and the dependent care tax credit should be bigger. He noted the dependent care tax credit for one individual went up $240 or about $20 a month. “That doesn’t really strike me as significant or relief,” Hinds said. “This is not the time for incrementalism.”
Baker indicated he wouldn’t have a problem with upward adjustments in both the rental tax deduction or the dependent care tax credit. “If you guys want to do more on the rental thing, you won’t get an argument from us,” he said.
The Baker tax breaks that generally benefit higher income residents would cut the tax rate on short-term capital gains from 12 percent to 5 percent and double the threshold at which the estate tax kicks in to $2 million and have it apply only to the amount over $2 million. Currently, the estate tax kicks in at $1 million and applies to the entire amount.
Hinds said he was sympathetic to adjusting the estate tax because it is a concern to farmers in his western Massachusetts district. But he suggested the $231 million cost of Baker’s proposal was too high given that the benefits flow primarily to the wealthy.
Baker said his proposal is the “cleanest way and the most understandable way to approach it” and insisted the change was needed to keep the state from losing more and more residents to lower-tax states. Baker said 33 states don’t have any estate or inheritance tax and only one, Oregon, has a threshold of $1 million. He said the Oregon tax only applies to an estate’s value over $1 million. He said New Jersey estate tax exempts a person’s primary home.
Michael Heffernan, the governor’s secretary of administration and finance, said one in 10 single-family homes in Massachusetts are approaching $1 million in value. Baker said anyone who leaves Massachusetts to avoid the estate tax takes all of their tax payments with them.
“We are losing money to people who are literally just replatforming their lives in a way that’s not that complicated for them and leaving Massachusetts as residents,” Baker said. “We lose all of their incomes up until the time they die.”
Hinds also questioned the need to pare back the tax on short-term capital gains, calling the timing jarring. “The last two years people in my district are talking about Wall Street going through the roof and breaking records and yet our food bank lines are going around the block,” he said. “There is a real disconnect in who benefits in the economy right now and this is the timing to make sure our wealthiest have a bigger tax break? Why now”
Baker said the change is needed to make the state competitive. “From our point of view the Commonwealth’s short term capital gains tax doesn’t look like it looks in any other state in America at a point in time when people have figured out that where they work doesn’t necessarily have to be very close to where they live,” he said.