Governor Charlie Baker on Wednesday proposed giving Massachusetts residents nearly $700 million in new tax breaks, including exempting hundreds of thousands of low-income workers from paying state income taxes, reshaping Massachusetts’ estate tax, and doubling certain credits for seniors and parents.
The second-term Republican said he was filing the suite of proposals with his $48.5 billion spending plan, offering one of, if not the, most sweeping tax relief packages of his tenure as he embarks on his final year in office. The Democrat-controlled House and Senate would have to approve any of the changes before they become law.
“The cost of just about everything is going up,” Baker told reporters Wednesday, citing inflation rising nationwide at its fastest pace in nearly four decades. “The last two years have been pretty tough on a lot of the populations we’re looking to help here, and I’d love to see the Legislature take them seriously.”
Baker is not seeking any broad-based tax increases to offset the tax breaks, and his budget chief contended Wednesday that the plan included no “hidden cuts” in a bid to absorb them.
The Baker administration argues the math works.
The governor’s budget projects spending $1.1 billion less on the state Medicaid program after officials scour the rolls and remove those no longer eligible from the more than 2 million currently getting insurance through what’s known as MassHealth.
And the state is flush with tax revenue.
“Taxes are not a zero-sum game,” said Michael J. Heffernan, Baker’s finance secretary. “We have not sacrificed services or programs for this $700 million. Not at all.”
Baker’s budget plan also pours roughly $485 million more into direct aid to Massachusetts schools, and dedicates an extra $250 million to help cover the state’s pension costs on top of its typical transfer.
Baker, who is not seeking reelection this fall, had teased plans for the tax breaks Tuesday during his final State of the Commonwealth address, urging Democrats in the Legislature to help “invest in Massachusetts families.”
Among the $693 million in proposals he outlined Wednesday is one to raise the income threshold for residents to qualify for “no-tax status” and effectively put the state closer in line with federal thresholds, according to his budget office.
Currently, single tax-filers making less than $8,000 a year, heads of household making less than $14,400, and joint filers reporting less than $16,400 are exempt from filing state income tax returns. Under Baker’s proposal, those standards would go up to $12,400, $18,650, and $24,800, respectively, and would help save 234,000 taxpayers roughly $41 million, according to Baker aides.
Baker is also seeking to double the maximum credit low-income seniors can claim to offset property taxes, from $1,170 to $2,340, as well as double a pair of refundable tax credits people can claim for dependents or child care, equating to $167 million for more than 700,000 families.
“You’re definitely making our tax code more progressive,” said Eileen P. McAnneny, president of the Massachusetts Taxpayers Foundation, a business-backed budget watchdog. The range of proposals are individually “targeted,” she said, “but people all along the income spectrum will see some relief.”
Baker’s also calling for dramatic changes to the Massachusetts estate tax. Currently, just 12 states, plus Washington, D.C., tax estates after death, according to the AARP, with Massachusetts taxing between 0.8 percent to 16 percent on estates above $1 million. That’s tied with Oregon for the lowest threshold in the country.
Baker wants to double it to $2 million, and tax only those dollars after that threshold; currently, should an estate exceed the $1 million mark, all the money is taxed. State officials said the changes would create $231 million in breaks for 2,500 taxpayers.
“A million dollars sounds like so much except that it will buy you a one-bedroom condo in Brookline,” said Amy Pitter, chief executive of the Massachusetts Society of CPAs and a former state revenue commissioner. “There are a lot of people who fall into this million-dollar threshold who are not rich, not even close to rich. This helps the middle class.”
Pitter said it’s probably not a coincidence that Baker is trying to tackle the estate tax now, with a proposed income tax surcharge on earnings above $1 million headed to the ballot in November.
Baker’s proposal also includes changes to allow some 881,000 people to deduct up to $5,000 on what they pay in rent, an increase from the current $3,000 cap. The change, however, would give renters an additional $100 annually, said Joe Kriesberg, president of the Massachusetts Association of Community Development Corporations.
Kriesberg praised Baker’s effort to devote tens of millions more in his budget to rental assistance programs, but suggested the money from the tax break — an estimated $77 million a year — would be better spent by targeting renters who really need it.
“Giving $100 to 800,000 people is probably spreading the peanut butter a little too thin,” he said.
Baker’s plan includes an additional measure to reduce the tax rate on short-term capital gains — investments held for up to a year — from 12 percent to 5 percent, dulling what his budget office framed as a penalty and saving 150,000 people a combined $117 million.
It was one of several proposals Baker and his aides described as a bid to make Massachusetts more competitive as residents increasingly embrace remote work. It also quickly drew criticism from the left-leaning Massachusetts Budget and Policy Center, which called it a potential windfall for some of the state’s wealthiest.
“These measures would cut revenue at a time when we need it to sustain the state beyond the pandemic,” said Marie-Frances Rivera, the center’s president, about the estate and capital gains tax changes.
How the plans will be received in the Legislature remains to be seen. Democratic leaders were noncommittal on Tuesday, saying they wanted to see details. And as the House and Senate release their spending plans in the spring, they’ll make clear their own priorities.
Baker’s office said rank-and-file lawmakers, including Democrats, have previously filed similar tax proposals, giving him confidence there could be an appetite for at least some of what he’s seeking.
He also is arguing that the state is in position to “give back” some revenue during heady fiscal times. Through December, the state said it had collected $1.55 billion above what it projected midway through the fiscal year, and Baker is expected to propose pumping hundreds of millions more dollars into the state’s emergency savings account by next year.
Currently expected to reach $5.9 billion by the end of this fiscal year, the account would grow to $6.64 billion by June 2023, thanks primarily to excess capital gain taxes, according to projections from Baker’s office.
At that level, the account would have nearly doubled from 2019 and grown more than five times since 2015, when it had about $1.25 billion midway through the first year of Baker’s tenure.
Baker has never sought permanent, broad-based tax cuts during his seven years in office, despite once supporting slicing the sales tax from 6.25 percent to 5 percent — as an unsuccessful candidate for governor in 2010 — and voicing support for reducing it during his 2018 reelection campaign.
He last year pitched a two-month sales tax “holiday” to give residents a New Hampshire-style break on most consumer goods while the state basked in billions of dollars in unexpected revenue. But the idea died in the Legislature almost as soon as Baker proposed it.
Baker indicated Wednesday that he believes pursuing a broad cut to the sales tax wasn’t feasible. “I want to work on tax proposals that I think are worthwhile and important and I believe have the possibility of making it through the process,” he said.
The budget plan includes $115 million for several new programs to boost behavioral health, help patients navigate the treatment system, and ease hospital “boarding,” in which hundreds of people in mental health crises are stuck in emergency departments waiting for care.
Baker administration officials said they would permanently increase the rates that MassHealth pays for outpatient mental health services by 10 percent, extending a temporary rate increase that began during the pandemic.
Priyanka Dayal McCluskey of the Globe staff contributed to this report.