Two weeks ago, the Executive Office of Administration and Finance (ANF) provided updated revenue projections for the current fiscal year (FY21). ANF now estimates an FY21 tax revenue shortfall of $3.6 billion. This new estimate resets the baseline from which the Governor and Legislature must build their respective FY21 budget proposals.
Drawing on a variety of one-time revenue sources, including the state’s “rainy day” fund, the Governor proposes funding most program areas at levels similar to the levels provided in FY20. One notable exception is the state’s MassHealth program, for which the Commonwealth has received additional federal reimbursements, allowing the Governor to extend care to a growing number of people in need.
Overall, the Governor adopts an approach that could be described as “try to minimize harms to the most vulnerable.” While a commendable guiding principle, a budget built from a mix (in most areas) of near-level funding and limited cuts necessarily imposes significant harm.
Ultimately, the Governor’s FY21 budget does not rise to the challenges of the moment we are in. It will not fill the many holes created by rising needs in the face of the COVID pandemic. It will not spur our economy toward a rapid, robust and just recovery. And it certainly will not correct for decades of deep underinvestment in the structures that are the bedrock of our collective wellbeing and our future prosperity – things like education, transportation, and housing. In the short-term and the long-term, the Governor’s austerity budget is a losing proposition.
Fortunately, we have an alternative. Instead of harmful austerity, we can choose to invest fully in our people and our future, to build a thriving and equitable Commonwealth. How do we do that? By embracing the course recommended by over 90 Massachusetts economists in a letter delivered to lawmakers at the end of May: raise new revenue from high-income households and profitable corporations.
Massachusetts is a wealthy state, home to many high-income households and large corporations that are doing very well, even during the pandemic. The roughly 20 billionaires, for example, who make their homes and their fortunes here in the Bay State have seen their collective wealth rise by over $17 billion since last mid-March when COVID sent unemployment rates for regular people soaring. And while many businesses – especially smaller, brick-and-mortar businesses – have been hard hit, some corporations are turning record profits. It is more than reasonable to ask those who are prospering in our Commonwealth to contribute more, so everyone can survive and eventually thrive.
Here are just a few of the many options lawmakers have for raising substantial, additional, progressive revenue here in the Commonwealth:
- Let’s restore the tax on corporate profits to the pre-2010 level of 9.5 percent, up from the current 8.0 percent. This is a change that would affect only those corporations that are making a profit. This change could raise some $375 – 500 million a year.
- Let’s rejoin the federal government and many other states in taxing the profits that multinational corporations are generating here in the U.S., but which they are shifting onto the books of their subsidiaries in offshore tax havens as a way to avoid paying U.S. taxes. The federal government already identifies and taxes this Global Intangible Low Taxed Income (GILTI), and Massachusetts can recouple easily to the relevant federal provision. This change could raise some $200 – 400 million a year.
- Let’s raise the tax rates on unearned income. This includes income from bank interest, dividends paid to corporate shareholders, and capital gains received from the sale of stocks, bonds, real estate, artwork and more. Unearned income flows overwhelmingly to high-income, white households. Currently, unearned income is taxed at the same 5.0 percent rate as wage and salary income. During periods of strong economic and/or stock market performance, this change could raise some $465 million a year for each percentage point increase in the relevant rates. (Stay tuned for a soon-to-be-released MassBudget report on taxing unearned income.)
- Let’s prevent the scheduled January 1, 2021 return of the state charitable deduction, a tax break that would deliver its benefits overwhelmingly to the very highest-income households in the state. Dwarfed by the much larger federal charitable deduction, an additional state deduction is unlikely to affect meaningfully the amounts people choose to give to charity. This change would prevent the Commonwealth from losing some $300 million a year in revenue.
- Let’s eliminate ineffective, costly corporate tax breaks – like the single sales factor (SSF) tax break provided to mutual fund companies. This tax break allows mutual fund companies operating in Massachusetts to use a special formula for calculating how much of their global profits will be taxed by the Commonwealth. Businesses in most other industries do not get to use this special formula. This change could prevent the Commonwealth from losing some $180 million a year in revenue.
Working with these and other revenues, lawmakers can build a more complete FY21 budget, one that prevents harm to the most vulnerable, avoids the austerity trap, and unlocks the full potential of people throughout the Commonwealth.