Sets Up Tax Showdown by Striking Delay in Charitable Giving Deduction
Gov. Charlie Baker on Friday signed into law a $47.6 billion budget for this fiscal year, striking $7.9 million in spending from the bill lawmakers sent him a week ago and also vetoing a section that further delays implementation of a charitable giving tax deduction approved by voters in 2000.
In a message to legislators, Baker said the bill grows spending by about 3.6 percent over last year, excluding certain fund transfers. The final budget contains $2.9 billion more than the spending plan Baker filed in January but is also based on significantly higher tax collection estimates than were in place over the winter.
More than half of that increase, or $1.4 billion, is in MassHealth, “where the extension of the federal public health emergency leads to higher enrollment projections, but also higher federal reimbursement that offsets the spending increase,” Baker wrote.
“In the six months since I filed the first draft of this budget, the reopening of the economy has allowed our residents to start to reengage with the routines of public life,” he said. “Meanwhile, to an almost unprecedented degree, federal fiscal and monetary policies have supported household, business, and government spending. As a result of this economic activity, tax collections this spring substantially exceeded forecasts.”
The surge in tax collections led legislative negotiators to boost revenue expectations and safeguard savings by canceling a planned $1.5 billion withdrawal from the state’s rainy day fund.
In a cautionary note, Baker wrote that the state must “remain alert to the risk that economic activity has been bolstered by ultimately unsustainable levels of federal spending, and that our currently high tax revenue growth might slow down as federal emergency spending phases out.”
“Reflecting this mixture of confidence and caution, the Legislature proposed that we set aside $600 million in this budget for future education and pension costs ($350 million and $250 million respectively),” he wrote. “We applaud the instinct to use unanticipated revenue for future liabilities, but respectfully suggest that we could achieve the same result, with less risk, by making those transfers from the Fiscal Year 2021 (FY21) surplus rather than a projected future surplus.”
The governor returned 25 policy sections to lawmakers with proposed amendments, including the sections transferring $250 million to the Commonwealth Pension Liability Fund and $350 million to a new Student Opportunity Act Investment Fund.
“Both transfers have merit,” Baker wrote, before cautioning that the state’s fiscal picture could change and offering language that would instead transfer the same amounts of money from surplus fiscal 2021 funds.
Baker said he vetoed “$7.9 million in spending that I see as problematic for reasons specific to the particular line items involved” and approved about $90 million earmarked for one-time local projects, a decision that will go over well with legislators who inserted those spending directives.
Of the 149 outside sections, Baker also vetoed two and signed 122.
One of the rejected sections called for a study on the COVID-19 pandemic’s impacts on children’s behavioral health and related services, and the other postponed the implementation of a tax deduction designed to increase donations to charities and non-profit organizations.
Voters approved the charitable deduction in 2000, but its implementation has been frozen and delayed over the years. Baker said he struck the latest proposed delay because “the combination of strong state revenues and serious needs facing non-profits and charitable organizations necessitates this tax deduction’s going into place.”
The Massachusetts Nonprofit Network, which supports the veto, estimated that more than 627,000 low- and middle-income donors would use the deduction each year.
“This is the right time to restore the state charitable deduction,” Jim Klocke, the network’s CEO, said in a statement. “It will promote charitable giving, and will benefit donors across Massachusetts — most of whom are low- and middle-income residents. State revenues are growing rapidly and now we can restore the deduction.”
Lawmakers described their budget as having a $48.1 billion bottom line. The smaller $47.6 billion total the administration uses excludes a Medical Assistance Trust Fund transfer.
The new budget does not include any broad-based tax hikes, and it increases Chapter 70 funding to local school districts by $219.6 million, to a total of around $5.5 billion.
It makes the state’s film production tax credit permanent by removing a 2022 sunset date and imposes more stringent eligibility requirements around the program.
The Massachusetts Production Coalition said that making the incentive permanent leaves Massachusetts “positioned to capture a major portion of the jobs and revenue created by the new productions planned in the post-pandemic entertainment industry.”
Cheering a “watershed moment” for its movie division members, Teamsters Local 25 said preserving the credit will help film production workers thrive in Massachusetts.
The budget includes $571 million for the University of Massachusetts system.
“This support, combined with the federal investments advocated for by our congressional delegation and the innovative management of our campuses, have positioned the university to serve as a central pillar in the Commonwealth’s post-pandemic economic recovery,” UMass President Marty Meehan said in a statement.
