Bill includes $654M in tax relief in FY24, $1.1B in FY26 and beyond
On April 13, 2023, in an effort to provide financial relief to families across the Commonwealth, and to make Massachusetts more competitive with other states, Rep. Joe McGonagle along with his colleagues in the Massachusetts House of Representatives passed a tax relief proposal targeted at residents across all income levels: H.3770, An Act to improve the Commonwealth’s competitiveness, affordability, and equity. The Massachusetts House of Representatives approved the bill, 150-3, and on April 18, the Senate referred it to its Committee on Ways and Means.
“I’m thrilled that we have passed such a crucial bill so early on in our two-year session in the Legislature,” said McGonagle. “This bill gives financial relief to residents and businesses in Massachusetts, and makes living here more affordable while also keeping the Commonwealth a thriving place to work and own a business. We are investing in the future of Massachusetts. The work done by Speaker Mariano, Chair Michlewitz, and Chair Cusack, along with their staff and committees was so crucial in developing this bill to be as useful and comprehensive as possible and I’m so grateful for their hard work and leadership.”
The bill includes the following tax changes, some with a phased-in implementation method:
Child and Dependent Tax Credit: The bill combines the Child Care Expenses Credit with the Dependent Member of Household Credit to create one refundable $600 credit per dependent, while eliminating the current cap. This will be phased in over three years and will be fully implemented in FY27: Taxpayers could claim $310 per dependent in FY24, $455 per dependent in FY25, $600 per dependent in FY26 and $614 per dependent in FY27. This change will cost $165 million in the first year of implementation and $487 million when fully implemented in year three. It is expected to impact over 700,000 Massachusetts families.
Estate Tax: Massachusetts is currently a national outlier on the estate tax, as the Commonwealth is one of only 12 states that impose this tax and has the lowest estate tax exemption threshold in the country, along with Oregon. The bill increases the estate tax threshold from $1 million to $2 million and eliminates the “cliff” effect, taxing the value of the estate that exceeds $2 million, and not the entire estate, as the law currently requires. This is expected to cost $231 million per year.
Senior Circuit Breaker Tax Credit: This bill doubles the Senior Circuit Breaker Tax Credit from $1,200 to $2,400. This change is expected to impact over 100,000 taxpayers who own or rent residential property in Massachusetts as their principal residence. This will cost $60 million per year.
Rental Deduction Cap: This bill increases the rental deduction cap from $3,000 to $4,000. This is expected to impact about 881,000 Massachusetts taxpayers and cost $40 million per year.
Short-term Capital Gains Tax: Massachusetts is among the states with the highest short-term capital gains tax rate, which is currently 12 percent, and taxes short-term capital gains at a higher rate than long-term capital gains, which are currently taxed at five percent. The bill lowers the short-term capital gains tax rate to five percent and phases in that change over two years. During year one, short-term capital gains will be taxed at eight percent, before ultimately reaching five percent during year two. This will cost $67 million in year one and ultimately cost $130 million annually, starting in year three of its implementation.
Single Sales Factor Apportionment: Currently, most businesses in Massachusetts are subject to a three-factor apportionment based on location, payroll and receipts. To make Massachusetts more attractive to multistate companies, this bill establishes a single sales factor apportionment in Massachusetts based solely on receipts, matching what 39 other states currently do. This change is projected to cost $115 million in year one and ultimately cost $79 million annually, starting in year two of its implementation.
Earned Income Tax Credit (EITC): This bill increases the EITC from 30 percent to 40 percent of the federal credit. This is expected to impact about 396,000 taxpayers with incomes under $57,000, and cost $91 million.
Additional Reforms: In addition to tax relief, the bill changes Chapter 62F of the Massachusetts General Laws, which triggered nearly $3 billion in taxpayer refunds in 2022. This law requires that excess revenue be returned to taxpayers when tax revenue collections in a given fiscal year exceed an annual tax revenue cap. Currently, the credit is applied to the personal income tax liability of all taxpayers on a proportional basis, resulting in higher credits for those who paid more in taxes. The bill adjusts the credit to an equal amount per taxpayer, rather than a rebate based on a percentage of what taxpayers paid the Commonwealth.
The bill also adjusts the Stabilization Fund cap, which currently requires that if the amount remaining in the fund at the end of a fiscal year exceeds 15 percent of the budgeted revenues and other financial resources pertaining to budgeted funds, the excess funds must be transferred to the Tax Reduction Fund, which would then be transferred to taxpayers through one-time increases in the personal exemption allowable against income tax liability. The bill adjusts the cap to 25.5 percent, which allows the Commonwealth’s savings account to retain more funding.