It’s been a mixed budget season for Massachusetts in terms of state tax policy, unless the Legislature chooses to override the Governor’s veto. With the FY 22 Budget process almost at a close, it appears the final budget is likely to make our upside down and inadequate tax system worse in a number of important ways. Legislative overrides of several of the Governor’s vetoes, however, can correct some of these problems, while preserving hundreds of millions of dollars in progressive state revenue. Notably, the FY 22 Budget, however, also includes a set of changes that will provide modest though meaningful help to low-income families. Here are the details:
On the positive side, Senate President Spilka and Senate Ways and Means Chair Rodrigues successfully pushed to turn a set of tax deductions – related to offsetting the cost of childcare and eldercare for low-income families – into refundable tax credits. Refundability will allow an estimated 85,000 low-income households who previously might not have benefited from these tax breaks to receive up to $480 in a direct cash payment from the Commonwealth. The state’s cost for this change to refundability is small – estimated at $16.3 million per year – relative to some of the large, regressive tax changes included in the budget (see below). This shift to refundability will improve the fairness of the Massachusetts tax code.
On the negative side of the ledger, the legislature and Governor both have approved making the state’s Film Tax Credit a permanent feature of our tax code. This is in direct contradiction to the findings of the Legislature’s own Tax Expenditure Review Commission (TERC), which issued a report stating that the Film Tax Credit is expensive (typically some $80 million in lost revenue per year) and inefficient when it comes to creating jobs. Not surprisingly, the TERC concluded that the Film Tax Credit is not a good use of the state’s limited resources. Analysis provided in the Department of Revenue’s periodic reports on the Film Tax Credit likewise invariably support the TERC’s findings. And as even supporters of the Film Tax Credit concur, after 15 years in operation, the Film Tax Credit has failed to create a self-sustaining film production industry in Massachusetts, one that can support itself absent a large, ongoing annual state subsidy. The Film Tax Credit is bad tax policy and should be eliminated from the Massachusetts tax code.
On another bad note, the Governor chose to veto the Legislature’s decision to delay the implementation of a state Charitable Deduction. This new tax break – which will go into effect unless the Legislature overrides the Governor’s veto – will be expensive, ultimately costing the Commonwealth some $300 million per year. Meanwhile, its benefits will go overwhelmingly to our state’s highest-income households. Over half of the tax benefits will accrue to households with over $1 million a year in income, while just under 10 percent of the benefits will go to households earning less than $100,000 per year. There is no evidence nor good reason to believe that introduction of this state-level credit will have a meaningful impact on the charitable giving decisions of Massachusetts tax filers. As with the Film Tax Credit, the Charitable Deduction is bad tax policy and should not be introduced into our state tax code.
Similarly, the Governor chose to veto the Legislature’s decision to eliminate two, relatively obscure business tax breaks: the Harbor Maintenance Tax Credit (about $1.5 million per year) and the Medical Device User Fee Tax Credit (about $500,000 per year). The Tax Expenditure Review Commission strongly endorsed removal of these credits from the state’s tax code, determining that they are largely irrelevant in today’s economy, are not matched by similar credits in neighboring states, and are “claimed by a limited number of predominantly large corporations.” Simplifying our tax code and making it more fair by eliminating wasteful, lopsided tax breaks – even smaller ones – should be a priority for both the Governor and the Legislature. To that end, an override by the Legislature of these vetoes would be appropriate.
While the Legislature cannot correct, at this time, the unfortunate decision to prevent sunsetting of the Film Tax Credit, the Legislature can act to override the Governor’s ill-advised vetoes affecting these three other tax break. We strongly encourage them to listen to the advice provided by the Tax Expenditure Review Commission and do so.