As Beacon Hill begins budget debate, tax breaks come under scrutiny

A crew prepared to film a scene of "The Tender Bar" last month in Boston's South End.Craig F. Walker/Globe Staff

As an uncertain budget process kicks off on Beacon Hill this week, the stage is set for a debate over how Massachusetts hands out $17.8 billion a year in tax breaks, heralding the possibility of major changes to state tax law even as lawmakers have largely taken broad-based tax hikes off the table.

A government report released last month targets 10 such tax breaks — collectively costing well over $200 million each year — that analysts say don’t earn enough money to justify their expense or are simply no longer relevant.

In the Senate, budget chairman Michael J. Rodrigues says it’s time to reexamine where that money is going, and the chair of the revenue committee called the budget a fertile opportunity to pursue tax changes, even as revenues prove unexpectedly high amid the pandemic.

In the House, by contrast, leaders have voiced support for extending at least one controversial exemption.

The issue could mark an early rift between the two Democratic-dominated chambers.

“The timing is good,” Senator Adam G. Hinds, cochairman of the Committee on Revenue, said of remolding various tax breaks. Hinds, a Pittsfield Democrat, is also the leader of a Senate working group that’s expected to recommend changes to the state’s tax code in the coming weeks.

“We have had a long period of trying to understand how we’re spending our hard-earned tax dollars and making sure we have the revenue necessary,” he said. “And we’re incredibly conscious from a day-to-day and week-to-week basis of what our revenue picture looks like. Expenditures are getting more attention than they have in any previous budget that I’ve been part of.”

In the crosshairs once again is the film tax credit, which costs the state $56 million to $80 million per year. There’s also a $21 million annual tax break for certain mutual funds, a deal that once promised job retention in return, a guarantee that lapsed decades ago, the report says.

“The Legislature,” the report advises dryly, “may wish to review the continuing purposes of this tax expenditure.”

Rodrigues, a Westport Democrat, said he’s troubled, in particular, by the film tax credit, citing how much of the money intended to bring film-related jobs to Massachusetts ends up out of state. In 2016, the most recent year of data available, $35.5 million in wages generated by the credit went to millionaires who don’t live in Massachusetts, compared to $25 million for residents.

“Everyone gets excited about the Hollywood glitz and glamor,” Rodrigues said. “Why are we supplementing the salaries of Hollywood stars?”

But the credit has a powerful supporter in House Speaker Ronald Mariano, who has said he’ll fight to continue the program. Currently, it is set to “sunset” in 2023, a plan the House is expected to oppose, though when is unclear.

“Producers are looking for locations to make long-term commitments, and the existing sunset language is preventing Massachusetts from becoming truly competitive and creating job opportunities,” Mariano said in a statement.

Beyond tax breaks, leaders have indicated tax hikes are not in the offing. Mariano said in a WCVB appearance in February that the House has “no intention of raising taxes,” and Senate President Karen E. Spilka told Bloomberg Radio last month that she’s not “planning” any tax increases in the Senate’s budget process.

State Auditor Suzanne Bump, who sat on the tax review commission, said the film tax credit is a “lightning rod,” but that there are smaller tax credits lawmakers could target, should they choose, including the capital gains deduction on the sale of collectibles like art or classic cars and a medical device user fee credit.

“There are some you can more readily act upon right now,” she said.

Debate over the film tax credit has reared its head often during the measure’s 15-year existence, including when Governor Charlie Baker tried twice, unsuccessfully, to scale it back.

The program includes a 25 percent payroll credit for any project that spends more than $50,000 in the state. Productions that spend more than half their total budget in Massachusetts — or film at least half of the time in the state— are also eligible for a 25 percent production credit and a sales tax exemption.

Critics have assailed the program as an inefficient use of taxpayer money that costs the state more than $100,000 for each job created. But proponents have touted it as a definitive factor in bringing production companies to Massachusetts, calling it a program whose economic benefits aren’t captured by the state’s outdated fiscal accounting.

Representative Tackey Chan, who has filed legislation to eliminate the tax credit’s sunset, said he does not know whether Mariano, a fellow Quincy Democrat, will attempt to include such a provision in the budget. But even if not, he said, “this conversation is not over.”

“It’s going to be part of our economic stimulus,” he said.

The debate comes as lawmakers draft their second budget amid the pressures of the coronavirus.

Last year, the pandemic shocked the budget process, delaying it for months and bringing fears of a financial doomsday. This year, lawmakers expect to follow a more traditional schedule of debating the budget in April and May. And they will enjoy rosier-than-expected tax revenues.

“Even in a universe where COVID never happened, the kind of revenues I’m expecting to see would be strong,” said Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University.

That’s good news for budget writers, but a potentially bad omen for those who’d like to see the tax breaks axed: With less anxiety about the state’s financial situation, lawmakers have less incentive to look for trims.

“I don’t see that as a top priority precisely because tax revenues are likely to be strong,” Horowitz said.

State lawmakers got more good news in the form of the latest federal coronavirus relief package, which will deliver billions to the state for priorities like education and transportation.

Rodrigues said he doesn’t anticipate those federal dollars figuring prominently into the state’s budget, given that federal officials haven’t specified exactly what the constraints are on how they can be spent. But analysts agree federal aid was critical in warding off the revenue collapse some had predicted.

“We’re in much better shape than we thought we would be a year ago,” Rodrigues said.

Tax credits have loomed in debates prior to the pandemic. As part of a $600 million tax package debuted just days before Baker declared a state of emergency in March 2020, the House passed language to eliminate a sales tax exemption that rental car companies enjoy when buying their fleets, freeing up an estimated $110 million a year. The Senate never took up the package, and it’s unclear if the provision could surface again.

“It’s a glaring kiss to the industry as a whole,” Mariano said in February 2020.