Massachusetts lawmakers unveil $1 billion tax relief deal, with vote this week

By Matt Stout, Samantha J. Gross and Jon Chesto Globe Staff, Updated September 26, 2023, 4:45 p.m.

Hailing it as a historic win for taxpayers, Massachusetts lawmakers will begin voting Wednesday on a $1 billion tax package that would boost tax breaks for families, seniors, and others while slashing state taxes on profits from short-term investments, a change that had divided Democrats.

The package would save hundreds of thousands of taxpayers a collective $561 million this fiscal year, according to legislative officials, with expectations that the total savings would eventually climb to just over $1.02 billion once it goes into full effect in fiscal year 2027, which begins July 1, 2026.

Its emergence follows nearly two years of debate and months of closed-door negotiations about how best to ease the burden on taxpayers squeezed by the state’s rising cost of living and bring the tax code more into line with other states.

The House is expected to vote on the measure Wednesday, and the Senate on Thursday, and it is expected to pass and move on to Governor Maura Healey, who has championed the need for tax relief.

“It is the largest bipartisan legislative tax relief proposal in over a generation, and I think in probably everyone’s collective memory,” Senate President Karen E. Spilka said Tuesday. “This is real money that our families need the most.”

The legislation is wide-ranging, according to a legislative summary. It would reshape the estate tax, currently considered one of the nation’s strictest, by hiking the threshold at which the tax kicks in from $1 million to $2 million. Moreover, the legislation would offer a tax credit that seeks to offset the so-called cliff effect, where an entire estate is taxed once it hits the threshold, not just the amount over it.

Just 12 states tax estates after someone’s death, and currently only Oregon and Massachusetts begin taxing them at $1 million. The change contained in the bill would cost the state $210 million per year, and largely benefit the wealthier estates.

The bill also would double the tax credit for seniors who rent or own in Massachusetts from $1,200 to $2,400, raise the deduction for renters from $3,000 to $4,000, and increase the earned income tax credit — designed to help low-income families — from 30 percent to 40 percent of the federal credit.

It would also create what legislative officials said is the most generous universal child and dependent tax credit in the country. The bill would combine two existing credits — for child care and dependent care — into one, and would allow taxpayers to claim $310 per dependent in the first year of implementation. The bill also lifts the cap on how many dependents a taxpayer could claim. The size of the new credit would then jump to $440 per dependent in the second year, saving hundreds of thousands of families an estimated $300 million.

That figure represents a compromise: Healey and the House had pushed for an even more generous credit of $600 per dependent, while the Senate had passed language capping the increase at $310.

A Senate plan to increase the cap on credits awarded to developers through the Housing Development Incentive Program, or HDIP, also survived negotiations. It would rise to $57 million in the first year, from $10 million now, and then return to a new permanent cap of $30 million.

In a compromise, the bill would also cut the tax rate on short-term capital gains — profits on investments held up to a year — a measure that Healey and the House had embraced but senators disliked, arguing the state should be focused on “families, not on corporations.”

The chambers ultimately agreed to slash the tax rate from 12 percent to 8½ percent, a more modest cut than the House proposal for 5 percent.

The compromise language was “about making sure there was balance in the tax package” in addition to addressing the needs of more vulnerable residents, said Senator Susan Moran, a Falmouth Democrat and the chamber’s chair of the revenue committee.

“You really want to be sure that people are able to really live in and afford their communities first,” she said. “That being said, a rising tide lifts all boats.”

The package would also give the business community another item on its wish list: a switch in how state corporate taxes are calculated to what is known as the “single sales factor.” With some exceptions for certain industries, Massachusetts corporate tax is currently calculated using three factors: a company’s local employment, property holdings, and in-state sales. The bill would simplify it to rely solely on the amount of a company’s sales within the state.

Doug Howgate, president of the business-backed Massachusetts Taxpayers Foundation, said he was happy the negotiators included just about every element in both the House and Senate proposals, even if some were scaled back.

“They really included some version of everything,” he said.

The bill, however, received a mixed response from other business leaders, some of whom fretted the changes may not go far enough.

Elizabeth Mahoney, vice president of the Massachusetts High Technology Council, said the new single sales apportionment “brings us in line with the way most other states do this.” But changes to the estate and short-term capital gains taxes are too modest to change the state’s outlier status, she said. Massachusetts, for example, will remain one of just three states that tax short-term gains more than other income.

“We’re concerned that some of the other competitiveness items are more on the modest side,” Mahoney said.

Jim Rooney, chief executive of the Greater Boston Chamber of Commerce, said the agreement marks a “pivotal day” for the state, even if the business community didn’t get everything it wanted.

“Public policy work in this arena of tax reform, it’s a long game,” he said.

The details of the bill emerged days after legislative leaders first said they reached an agreement on the wide-ranging package, which they announced but offered no details. In reality, discussions continued through the weekend, as lawmakers ironed out the language.

The Legislature hasn’t passed a significant tax relief bill in decades, and some of the most notable measures enacted in the past — such as slicing the state’s income tax to 5 percent — were spurred by ballot initiatives, not legislative action. The debate on this round of tax relief first began 20 months ago.

“I know a lot of people said, ‘When is it going to happen? When is it going to happen?’ ” Spilka said of tax relief. “It was really important that we get it right and help as many residents in as many different ways as we possibly could.”

Healey said she was “very pleased” with the House-Senate compromise.

“I campaigned on tax relief,” Healey said in an interview. “I promised that at the outset of my administration. Here we are eight, nine months later, and we have a comprehensive tax package that’s going to provide needed relief to businesses and residents across Massachusetts.”

The package includes an array of other policy changes. It seeks to change what’s known as Chapter 62F, a nearly 40-year-old law that requires the state to return excess revenue collections to taxpayers when revenues exceed a predetermined cap.

In 2022, the once-obscure law triggered the nearly $3 billion refund to taxpayers, which was returned on a “proportional basis,” meaning the more someone owed in income taxes, the higher the refund. The new bill adjusts the credit so that all taxpayers receive an equal amount — which critics have already questioned as potentially unconstitutional.

The bill also includes another change that would require all married couples who file joint federal returns to also file jointly at the state level, rather than individually, a measure some business leaders opposed. The goal, proponents say, is to prevent wealthy couples from avoiding the so-called millionaires tax, a new surtax on annual incomes over $1 million, by filing separately.

Matt Stout can be reached at matt.stout@globe.com. Follow him @mattpstout. Samantha J. Gross can be reached at samantha.gross@globe.com. Follow her @samanthajgross. Jon Chesto can be reached at jon.chesto@globe.com. Follow him @jonchesto.