Gov. Maura Healey has placed meaningful tax reform atop the policy agenda this session, with a $987 million package that was filed in conjunction with her inaugural budget. As we laid out in a recent report, significant tax relief is not only affordable, but even more critical than it was a year ago.
In 2022, Massachusetts was primed for its first major tax relief bill in years. After an initial proposal by the Baker administration, House and Senate legislative leaders coalesced around a package of $500 million in one-time tax rebates and $500 million in ongoing tax cuts. Unfortunately, in spite of broad consensus, ongoing tax relief never made it over the finish line, a victim of end-of-session fiscal drama brought about by statutorily required tax refunds.
Since then, three economic and fiscal factors have materially altered in Massachusetts and each factor makes the case for tax cuts even more compelling.
Arguments Grown Stronger
First, the affordability argument for tax relief is much stronger. Tax collections in fiscal years 2022 and 2023 will be about $8 billion higher than was expected when Gov. Charlie Baker first proposed a $700 million tax-cut package. At the same time, state reserves stand at record levels and state agencies have been unable to keep pace with the spending appropriations available to them.
Second, the cost crunch on Massachusetts families and employers continues to increase. As we pointed out in a report last year, Massachusetts places some of the highest cost burdens in the nation on our residents and businesses and spiking inflation make it even more challenging for working families to afford housing, childcare and other life necessities. Much work remains to be done to strengthen Massachusetts position as an attractive, accessible and affordable place in which to live or do business.
Third, Massachusetts just passed its largest ever tax increase. The new surtax on income over $1 million will apply to Massachusetts residents who may be small in number, but play an outsized role in the state’s economy. These residents, more mobile than ever, now have an added financial inducement to contribute to the 110,000 residents who left the state since the start of the pandemic.
Increasing costs and lower barriers to relocation pose a significant threat to the state’s economic future. Pricing out low and middle-income residents, while providing major disincentives for higher-wealth residents to live or invest in the state is a one-two punch that the state can’t afford. Thankfully, we can afford tax cuts.
Top Options for Cuts
The time is right for policymakers to provide permanent tax relief that eases cost burdens on residing and investing in Massachusetts and reduces incentives for high wealth residents to leave the state. There are six income and estate tax changes we should start with.
The state should increase existing tax credits for child and housing costs to directly address two of the biggest cost drivers that make Massachusetts unaffordable for so many. Gov. Healey’s proposal to raise the state’s child tax credit to $600 per child is a good start, as are her proposals to increase housing tax credits targeted to renters and fixed-income seniors.
We also have to look at elements of our tax code that make no sense in light of the surtax. The estate tax is an easy place to start. Massachusetts has the most onerous estate tax in the nation and it seems specifically designed to encourage residents to leave the state. Gov. Healey has proposed raising the state’s estate threshold to $3 million, but we should go further. MTF recommends beginning with a $5 million estate threshold. That change, coupled with a reduction in the 12 percent short-term capital gains rate, and reduction or elimination of escalator taxes on S-corporations would make progress on three notable tax outliers in the state.
Gov. Healey’s $1 billion tax package is not a silver bullet for solving the state’s economic challenges, but creates a strong foundation for making sensible changes to the tax code. By adding tax changes that directly reduce business costs, we can build on that foundation and begin to address cost issues that are driving families, jobs, and investment out of Massachusetts.
Doug Howgate is President of the Massachusetts Taxpayers Foundation.