Massachusetts Gov. Maura Healey’s tax relief package is one step closer to passage despite slumping revenue figures.
On Tuesday, the state Senate Ways and Means Committee unanimously passed a $55.8 billion budget for fiscal ’24, forwarding along to the Democratic-controlled chamber a $575 million tax cut plan that preserves many of the proposals the governor made earlier in the year.
The passage of a preliminary budget by the committee follows the release of a report by the Massachusetts Department of Revenue showing April revenue was down 31% year-over-year, with the state collecting $4.78 billion, $2.1 billion less than in April 2022.
Despite having “very bad” April, Massachusetts remains well-positioned to carry out a significant tax relief package, said Sen. Patrick O’Connor, the committee’s ranking Republican.
“We expected to see some sort of downturn in the revenues given the fact that there are so many different pockets of investments that the federal government made that still are out there,” he said. “But as far as revenue numbers go for the month of April, we should be able to move forward with the tax package that the governor presented.”
The Senate tax package includes most of the key proposals in the governor’s budget proposal, including a $600 child tax credit, new seniors tax credit, renters assistance, a reduction of the estate tax, and a centerpiece short-term capital gains tax cut that would reduce the rate from 12% to 5% over two years and boost Massachusetts’s economic profile, according to Healey’s office.
Under an agreement struck to avoid a government shutdown in April, new initiatives, including the tax proposal, were separated from a baseline budget allowing debate to continue past the budget deadline.
While the size or timing of certain provisions may change slightly, as was seen in a similarly styled state House plan passed this month, O’Connor said lawmakers would likely move forward with a package very similar to what the governor presented.
Massachusetts can lean on an its improved fiscal footing to manage the tax cuts no matter where the shifting post-COVID economy landed it, O’Connor added. That included fattened reserves and an improved credit profile.
S&P Global Ratings upgraded Massachusetts’s general obligation long-term credit rating to AA-plus from AA recently citing a strong rebound from the pandemic in which it “ended its last two fiscal years in an extremely strong financial position with the highest level of reserves in its history. “
Moody’s Investor service rates Massachusetts’ GO bonds an Aa1 with stable outlook, and Fitch Ratings an AA-plus with stable outlook.
In a Fitch Wire publication on Thursday, the rating agency highlighted Massachusetts in a national look at slumping state income tax collections around the country.
“Massachusetts also budgeted for a decline in fiscal 2023 revenues, but the actual drop in YTD revenues has been worse than expected,” Fitch noted.
Massachusetts is one of many states that may have seen a negative impact from pass-through entity taxes structured as a workaround to the $10,000 cap on state and local tax deductions in the 2017 Tax Cuts and Jobs Act, Fitch said.
Healey has stood by her plan in the wake of the revenue report and said budget writers had expected the decline and planned accordingly when drafting the spending proposal.
Like Healey’s, the Senate Ways and Means budget plan features new spending on education, including $310 million allocated to state universities and an additional $400 million for the state’s School Building Authority’s grant infrastructure program. It also includes a $500 million boost to the transportation budget.
Both spending initiatives are backed in part by the institution of a ‘millionaire’s tax,’ originally proposed by Healey, that levies a 4% surcharge on incomes over $1 million that officials estimate will net $1 billion in extra revenue.
In its revenue report, the Massachusetts DOR Commissioner Geoffrey Snyder highlighted steep dips in short-term capital gains as a major factor in tax declines for April.
According to Lucy Dadayan, a research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, cash capital gains earnings “played a significant role” for Massachusetts last year as the stock market, buoyed by federal aid and rapid economic recovery, increased on average by around 32%.
“When you look at the 10 months of fiscal year 2023, revenues are down by 13%” for the state, said Dadayan.
Massachusetts is not the only state to see revenues dip as it grapples with several economic pressure points; in addition to the end of federal COVID relief funding, states are also contending with “geopolitical tensions and the impact of the Fed’s monetary policy on financial and real estate markets, business investment, and consumer spending,” Dadayan added.
In the environment, it’s not a surprise that capital gains and other revenue streams are down.
“Given all these uncertainties, it’s not good time to do tax cuts,” Dadayan said.
Cyclical ups and downs are built into the Massachusetts revenue structure, S&P analysts wrote in their report about the April upgrade.
“The commonwealth still faces headwinds as national recessionary pressures persist, with long-term liabilities remaining among the highest in the nation and persistent underfunding of its pensions, which could lead to budgetary pressures as revenue growth softens,” they wrote.
The Massachusetts House passed its $56.2 billion budget proposal 150–3 in a vote earlier this month. The plan featured $654 million in tax relief aligned with the governor’s blueprint, including a capital gains tax reduction that House Ways and Means Chairman Aaron Michlewitz said in a statement would keep Massachusetts a “competitive work environment for both businesses and workers.”
Lawmakers were engaged in internal discussions to figure out whether or not April’s earning report was an “outlier,” focusing in part on the capital gains revenue loss, O’Connor said. He said he remains confident the bill will sail through the Senate and on to a bicameral budget committee, the final stage before heading to the governor’s desk.
“Massachusetts is very well prepared for this and we have been for quite some time,” he said. ”My hope and expectation is that it will remain largely untouched and what the governor put forward and what the House voted on, the Senate will go along with those tax cuts because it’s proven, at least to me, that’s very much needed to give Massachusetts a more competitive edge.”