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House Democrats have come around on the idea of slashing the state's short-term capital gains tax rate, weaving the proposal and another surprise business-friendly measure into a revived tax relief package that's anchored by a new tax credit for parents and caregivers.
The wide-ranging legislation unveiled on Tuesday and planned for a vote on Thursday combines several tax code changes lawmakers approved and then abandoned last year, like increased breaks for renters and seniors, with steps that newly have support among the House's leadership ranks.
House Speaker Ron Mariano pitched the bill (H 3770), which would cost $654 million in fiscal year 2024 and rise to an annual price tag of $1.1 billion in fiscal year 2026 and beyond, as a way to spread relief across the income ladder while making Massachusetts a more competitive home for both businesses and residents.
"We wanted to have something that we felt impacted all segments of the economy, all segments of our constituency, with some fairness and some equity," Mariano told reporters outside his office on Tuesday. "So we looked at all of the things that were on the table and evaluated them -- who was the beneficiary, what segment of the population were the beneficiaries of different tax cuts -- and tried to balance it and come up with a number that we thought would be responsible, that we could handle in a shifting economy."
"Let's hope that it makes us more competitive, and with that, people will hesitate before they think about moving," he later added.
Representatives will be asked to vote on the $1.1 billion tax plan a bit more than five months after voters approved a surtax on higher earners -- advanced to the ballot by Democrat lawmakers -- that budget-writers project will haul in $1 billion in new revenue in fiscal year 2024 that must be spent on education and transportation investments.
The legislation includes seven different reform measures, several of which mirror proposals Gov. Maura Healey made in her $986 million tax relief bill (H 42) or revive policies the House and Senate initially backed last year before retreating from the topic. House Democrats are also rallying around a major change to a 1986 voter-approved tax cap law that Democrats cited as the reason they abandoned targeted tax relief ideas last year.
Top House Democrats are moving quickly to bring the bill to the floor. It emerged Tuesday as a House Ways and Means Committee amendment in part to a spending bill Healey filed Jan. 31 (H 47), most of whose contents have already become law via separate legislation. Healey's standalone tax bill generated lots of testimony during a March 28 public hearing of the Joint Committee on Revenue, but that panel has held on to the bill and does not appear to be playing any formal role in the bill that the House will consider.
Following a poll that gave members one hour to weigh in, the House Ways and Means Committee favorably reported the bill Tuesday with 24 representatives in support and eight representatives -- whom a committee spokesperson did not identify -- declining to take a stance.
All representatives were given until 5 p.m. Tuesday to file amendments, and the House plans to take up the matter on Thursday.
The House bill would cut the state's 12 percent tax rate on short-term capital gains, which are profits realized by selling an asset held for less than a year, to 8 percent backdated to Jan. 1, 2023, and then again to 5 percent starting Jan. 1, 2024, a House official said. Mariano's office estimated the move will cost $67 million in the first year and $130 million in the second and subsequent years.
Healey similarly proposed slashing that tax rate to 5 percent, though her bill would execute the cut in a single year.
Embracing that change, which business groups have long sought and progressives oppose, is a new step for the House. Last year, when Republican Gov. Charlie Baker proposed lowering the short-term capital gains tax rate, the Revenue Committee omitted it from a bill that ultimately sputtered out.
Asked about what changed since last year to get him on board, Mariano replied "the economy, for one" and said Massachusetts has one of the highest short-term capital gains tax rates in the country.
"This whole competitiveness issue is real as we face challenges from states like North Carolina, with some of the bio stuff and as we compete on wind," Mariano said. "Capital gains is an important factor to investors, and we want to attract investment. We want to attract folks that want to be here and are comfortable with the way we tax. And so we felt it was time."
The proposal drew criticism from some voices on the left. "Our Democratic governor and Democratic Legislature fighting hard for the day traders ... ," tweeted Progressive Massachusetts Political Director Jonathan Cohn.
The bill also makes a change designed to make Massachusetts more attractive to multi-state companies, which are subject to a three-factor apportionment based on location, payroll, and receipts to determine how much income is taxable in Massachusetts. The proposal would establish a single sales factor apportionment based solely on receipts, matching what 39 other states currently do, according to House leaders.
Mariano's office said that change carries a one-year value of $115 million and a recurring cost of $79 million.
Only mutual fund service corporations, defense corporations and manufacturers are subject to a single sales factor apportionment in Massachusetts under current law, according to a House official.
Several major Massachusetts corporations have been pushing for lawmakers to overhaul the apportionment process. Last year, a coalition consisting of BNY Mellon, Citizens Bank, Dunkin', Santander US, State Street, TJX and TripAdvisor wrote to legislative leaders that the existing three-factor apportionment "puts Massachusetts-headquartered companies at a competitive disadvantage because the burden of the tax is more heavily borne by in-state employers than out-of-state businesses."
The House bill would double the threshold at which the estate tax kicks in, from $1 million to $2 million, and eliminate the so-called cliff effect. That means anyone who owes taxes on an estate worth $2.1 million would only be taxed on the $100,000 above the threshold, rather than the full value so long as the trigger is hit.
Both branches pursued a roughly similar estate tax change last year in their ultimately doomed package. Healey proposed effectively tripling the threshold to $3 million and wiping away the cliff effect with a system of credits.
Like the short-term capital gains tax, the proposed estate tax reforms have drawn the ire of progressive activists who argue that its benefits would flow primarily to wealthier Bay Staters and support of business groups who pitch it as a competitiveness issue.
"We felt that we did a lot of work a year ago on the estate tax," Mariano said, standing with House Ways and Means Committee Chair Rep. Aaron Michlewitz and Revenue Committee Co-chair Rep. Mark Cusack. "As a matter of fact, when Mark became the chairman, I think one of the first conversations he had with me was 'we've got to fix this.' He worked on this for almost two years now to get something that we thought was fair, and we saw no reason to really leave it when you put it beside the rest of the tax cuts."
The House proposal would double the senior circuit breaker tax credit from $1,200 to $2,400, a change expected to affect 100,000 taxpayers who own or rent residential property in Massachusetts as their principal residence. The value of that change is $60 million per year.
The bill raises the rental deduction cap from $3,000 to $4,000, affecting 881,000 Massachusetts taxpayers at a cost to the state of $40 million a year.
And the House plan increases the Earned Income Tax Credit (EITC) from 30 percent to 40 percent of the federal credit, a change that House leaders say will benefit 396,000 taxpayers with incomes under $57,000. This tax law change carries a value of $91 million.
Like Healey's bill, the largest annual cost in the House's tax plan -- $165 million in year one, $487 million once fully implemented -- would be a new $600-per-dependent tax credit offered to parents and caregivers in more than 700,000 families.
Both Healey and the House would combine existing programs to launch the new credit, but the House's bill would take three years to roll it out gradually, starting with $310 per dependent in fiscal year 2024.
"I haven't had a chance to look at it, so let me take a look at it and then I'll weigh in," Healey said at a separate event Tuesday when asked about the House's preference to phase in the credit. "But I'm glad to see that there is a tax relief proposal out there and will continue to be in conversations with both the House and Senate on all of this."
The rental deduction, senior circuit breaker, estate tax and earned income tax credit changes all featured in a tax relief proposal both the House and the Senate approved last year before legislative leaders retreated once they learned that state government owed nearly $3 billion in mandatory rebates.
That tax cap, known as Chapter 62F, led to small rebates in 1987 and was triggered for only the second time in 2022. And now, as the House prepares to take another pass at permanent relief, Mariano and his deputies have their sights set on the law that threw them off last year.
The House bill would require any relief provided under Chapter 62F to take the form of equal repayment for all taxpayers, regardless of how much they paid in taxes, rather than the existing system that steers larger checks toward higher earners.
"That whole package is based on the success of the economy. It only gets triggered when the economy is very, very successful, and we wanted everyone to share in that success," Mariano said. "We felt after watching the way the checks were made out and sent out, I think [Michlewitz, Cusack and I] sort of agreed pretty early on that there are fairer ways to do this."
Healey did not take a stance on the proposal by House Democrats to overhaul Chapter 62F, saying she had not seen it yet. Asked if any tax code change she sought represents a "dealbreaker," Healey said, "I think you go into all of these discussions in good faith and looking to find ways to work together."
"It's a matter of seeing what the House has done and continuing those conversations with the Legislature," she said.
Massachusetts Fiscal Alliance spokesperson Paul Craney said Mariano's push to change the voter-approved tax cap law "shows his disdain for the taxpayers," calling it "a trojan horse to eliminate one of the few protections taxpayers have from Beacon Hill taxing and spending."
The House bill would also make a significant change that Democrats say will allow the state to sock away more money in savings accounts. Existing law caps the amount the state can keep in its stabilization fund at 15 percent of budgeted revenues and requires any excess to be transferred to a Tax Reduction Fund, which provides relief to taxpayers via one-time increases in personal exemptions.
The legislation would push that cap to 25.5 percent, effectively allowing Beacon Hill to keep more money generated from taxes in state government's rainy day" savings account. In December, the News Service reported that the fund's FY22 year-end balance was about 75 percent of the way to the limit.
Lawmakers are facing sustained crosswinds as they set out to reform the state's tax code.
Bay State businesses continue to struggle to attract and retain enough employees for open jobs, and the shrinking population in Massachusetts has fueled growing concerns about the state's footing.
Right-leaning and business-friendly think tanks, such as the Pioneer Institute, argue that the tax climate is pushing higher earners and employers away, while left-leaning analysts like those at the Massachusetts Budget and Policy Center contend that the state is not in fact losing wealthier residents at that high a rate and that middle- and low-income families should be the focus.
State tax collections have risen in fiscal 2023 above the unprecedented levels established in recent years, but the pace of increases is slowing.
"We still don't know where inflation is going to land. We are a bit concerned about revenues. We're concerned about just the general economy of the U.S.," Mariano said. "I mean, we're in the midst of fighting a surrogate war, you know, and that affects oil prices and everything else along the whole chain of command."
The speaker described his push to implement some tax reforms over a multi-year period as a way to "implement growth in a safe, controllable package."
"It's about not coming out of the box and rolling everything out and saying, 'Is this gonna work or isn't it gonna work?' We feel we have more control based on the fact that we roll this out in smaller increments," Mariano said.
If Massachusetts dipped into a "full-fledged recession," Mariano said, "we'd have to reconsider the numbers."
"But based on what we've seen and what the predictions are, I think we're in a position to handle what we put on the table," he said.
Doug Howgate, president of the business-aligned Massachusetts Taxpayers Foundation, said he was struck by the difference in "scope" between the House's new bill and the relief both branches considered last year.
"The fact that when phased in, this is a $1.1 billion tax relief plan speaks to the idea that we all recognize the need to look at our tax code as a part of how we are making Massachusetts more affordable, how we're reducing those relocation incentives," Howgate told the News Service. "The themes it's looking at are absolutely affordability, but also how are people and organizations making decisions about where they locate."