Revenue Upgrade May Be Dealt With In Conference
Senate Democrats rolled out their $47.6 billion fiscal year 2022 state budget proposal on Tuesday, proposing an annual spending plan that reforms taxes for pass-through companies, overhauls the film tax credit program, and expands support for lower-income residents in the wake of the pandemic’s devastation.
The budget bill teed up for debate later this month aims to repair economic damage wrought during the COVID-19 pandemic without factoring in the billions in federal aid set to flow to Massachusetts or the state’s recently robust tax receipts.
Senate President Karen Spilka said the budget bill “seeks to put us on a stable fiscal footing and build a more inclusive and resilient commonwealth for all of us.”
“If the COVID-19 pandemic and its economic aftershocks have frayed the fabric of our commonwealth, this budget takes on the important but sometimes invisible work of stitching that fabric back together,” Spilka told reporters during a briefing.
The Senate Ways and Means Committee’s budget (S 3) calls for increasing state spending by $1.2 billion, or about 2.6 percent, above the fiscal year that ends June 30. Its bottom line — which will likely grow through the amendment process — is $1.8 billion higher than the bill Gov. Charlie Baker proposed in January and $64 million below the bill the House approved last month.
Like their House counterparts, Senate Democrats did not include in their budget any of the $4.5 billion Massachusetts will receive from the American Rescue Plan. The U.S. Treasury published guidelines Monday on how states can use those funds, and Senate Ways and Means Committee Chair Michael Rodrigues said his panel has not yet “had the time to dig into that.”
Also mirroring the House, the Senate built its budget on the assumption that Massachusetts will collect $30.12 billion in taxes in fiscal 2022, the so-called “consensus revenue” figure on which the Legislature and Baker administration agreed in January.
Since then, monthly tax receipts have surged well above expectations. If May and June collections hit their projected marks exactly, the state will wind up hauling in about $800 million more in fiscal 2021 than legislative budget-writers anticipate collecting in fiscal 2022.
Rodrigues said Tuesday that the decision to mark up the revenue base could fall to the private House-Senate conference committee that will negotiate a compromise spending bill.
“We do not unilaterally bump up consensus revenue figures — as the name implies, it’s a consensus, so it could be discussed in the conference committee,” Rodrigues said. “We are experiencing very robust revenues. We are excited about that, and we are hoping that would have significant positive impacts on how much we’re going to draw down from our (stabilization) fund. There’s always more to come when it comes to budgets, but we’ll work collaboratively with our friends in the House.”
The Senate’s budget bill calls for a maximum withdrawal from the state’s “rainy day” stabilization fund of $1.55 billion, $50 million less than Baker proposed and $325 million less than the House proposed.
Rodrigues said that drawdown would leave the fund, which had a balance of $3.52 billion before the pandemic and will also be used to cover spending this fiscal year, with more than $1.15 billion.
The Senate budget does not call for any broad-based tax increases on individuals, though it does propose a handful of new revenue sources not considered by the House, such as authorization of debit card lottery payments that Rodrigues estimated could bring in $30 million.
Both the Senate and Baker included the cashless lottery proposal in their fiscal 2022 spending bills after unsuccessfully pushing for it in prior budgets.
Another Senate proposal would reform state and local taxes, or SALT, for pass-through entities. Rodrigues said Senate Democrats modified language on the topic that Baker included in his budget to make it “revenue-positive” for Massachusetts.
“Basically what this does is it allows those individuals who work through what’s called pass-through entities, corporate partnerships, certain LLCs, that choose to have the income flow not from the entity, but through individual tax filers, to allow the entity to pay the state income tax for those individuals so that the entity can take a tax deduction off their federal income tax,” Rodrigues said.
The change, he said, would net $90 million in revenue for Massachusetts while saving those tax filers $1.18 billion at the federal level.
The Senate’s budget relies on some updated revenue projections that helped inform its smaller proposed withdrawal from the rainy day fund, Rodrigues said. Because the federal government extended the public health emergency through December 2021, the Senate estimated a $35 million increase in Federal Medical Assistance Percentage, or FMAP, reimbursements. Rodrigues also cited increases in projected lottery revenue and abandoned property returns.
“We dug deeper into non-traditional tax revenue to find other revenues to offset some of the use of the stabilization fund,” he said.
Legislative leaders agreed during the lead-up to budget season to boost Chapter 70 aid to school districts by $219.6 million, an increase from the $197.7 million Baker proposed, and both the House and Senate bills reflect that decision.
Both budgets would implement one-sixth of the 2019 school finance reform known as the Student Opportunity Act in an effort to put it back on track after the pandemic disrupted its seven-year implementation timeline.
Senators also followed their House counterparts in proposing a $40 million reserve fund to assist school districts whose enrollment estimates — and therefore state aid projections — were affected by COVID-19.
Tension could emerge between the branches over the state’s film tax credit, a controversial program to incentivize film and television production in Massachusetts that is set to expire at the end of 2022.
The Senate budget would push the sunset date to Jan. 1, 2027 while overhauling the credit itself.
To qualify for the credit, a production company must spend at 50 percent of its filming budget or conduct at least 50 percent of its principal photography days in Massachusetts. The Senate bill would increase that threshold to 75 percent, plus cap salaries or compensation eligible for the credit at $1 million and eliminate transferability of credits.
Rodrigues, who in 2017 clashed with House Speaker Ronald Mariano about the film tax credit, said Tuesday that the credits cost Massachusetts $60 million to $80 million per year.
“The critique of the existing film tax credit is too much of the money, the tax credits and the benefits of the tax credit, go to out-of-state individuals and out-of-state companies,” Rodrigues said. “We want to see more of the benefit be realized by Massachusetts residents and Massachusetts companies.”
Proposed reforms are based on recommendations from the Tax Expenditure Review Commission, Rodrigues said, adding that many of the tax credits are transferred to larger financial institutions seeking to reduce their tax liability in Massachusetts.
“We’ve heard loud and clear from the Department of Revenue that transferable tax credits are an administrative nightmare to track,” Rodrigues said.
During its April budget debate, the House unanimously approved an amendment that enshrines the film tax credit permanently by eliminating the sunset date. Mariano, who is in his first term as speaker, said the vote sends “a clear message to the film industry that we are open for long-term commitments and the economic benefits they bring to Massachusetts.”
Both Spilka and Rodrigues highlighted their budget’s focus on mental and behavioral health, senior care, and combating poverty, all areas thrust into greater scrutiny during the public health crisis and ensuing recession.
A $16.3 million proposal in the bill would convert a child care and dependent tax deduction into a refundable credit, which Rodrigues said would offer an average credit of $190 to about 85,000 low-income families.
The bill would also increase benefits offered through the Transitional Aid to Families with Dependent Children (TAFDC) and Emergency Assistance to Elderly, Disabled and Children (EAEDC) programs by 20 percent over their December 2020 levels and eliminate the asset limits for both programs, adding $43 million in total costs.
Among its investments, the Senate budget creates a new $6 million grant program to address student social and emotional learning initiatives and directs $1 million to launch a pilot program for universal mental health screenings in schools.
It also proposes $571.2 million in funding for the UMass system, $321.7 million for community colleges, $298.1 million for state universities, $27 million to increase nursing facility rates, $15 million to allow rate add-ons at facilities where at least 75 percent of residents have their care paid for by Medicaid, $15 million for a grant program aimed at communities disproportionately impacted by poverty and the criminal justice system, and $150 million for the Massachusetts Rental Voucher Program.
Two notable pieces of Baker’s budget bill do not feature in either the House or Senate budget bill: a plan to penalize pharmaceutical companies for excessively increasing drug prices, and revenue from sports betting, which remains illegal in Massachusetts amid ongoing debate.
The Senate Ways and Means Committee voted Tuesday to advance the spending bill with a favorable recommendation. Republican Sens. Patrick O’Connor of Weymouth and Ryan Fattman of Sutton voted in favor of it, while Senate Minority Leader Bruce Tarr opted not to vote.
“This is going to be a really good way that we can end the direct response to COVID and really start to build upon the recovery,” O’Connor, the panel’s ranking minority leader, said during the committee’s virtual hearing. “I appreciate all the work that has gone into this, and I look forward to the next few weeks as we continue to add more priorities as we continue to go through the budget process.”
The Senate plans to begin debate on its budget on Tuesday, May 25. Amendments are due by 2 p.m. on Friday.
