Senate Approves Income Tax Freeze To Fund Targeted Tax Relief

The Senate on Tuesday approved a package of tax cuts aimed at helping the working poor and middle class, dismissing objections from Republicans and some Democrats that their vote would renege on a 15-year-old promise to voters to gradually roll back the income tax to 5 percent.

To pay for increased personal tax exemptions for individuals and married couples and a 50 percent expansion of the earned income tax credit for low-income families, senators voted 29-11 to permanently freeze the income tax rate at its current 5.15 percent rate.

While proponents argued in favor of the tax cuts to help grow the middle-class and address wage stagnation, Republicans chastised the leaders behind the effort for proposing to pay for the tax cuts by halting the gradual decline of the income tax.

The amendment to the Senate's fiscal 2016 budget proposal, sponsored by Sens. Benjamin Downing and Michael Rodrigues, would increase the earned income tax credit by 50 percent over three years to 22.5 percent of the federal credit, costing the state about $145 million a year in tax revenue.

Over 415,000 tax filers in Massachusetts qualify for the earned income tax credit each year, according to Senate leaders, who said putting money back into the pockets of low-income families would also benefit the economy as the money is spent on local goods and services.

"Simply put, we haven't been helping working people. We haven't been helping the middle class. That's what this amendment would do. It would start to reconfigure our tax code to better help the working middle class, to better help the working poor, to help them get ahead at a time when their wages haven't caught up with the cost of health care, the cost of education or the cost of energy. It's a smart investment in the middle class," Downing said.

Senate Minority Leader Bruce Tarr, whose amendment to double the EITC to 30 percent without freezing the income tax failed, said Democrats were "breaking faith with the voters" who in 2000 approved a reduction of the income tax to 5 percent that has never been fully realized.

Tarr said Republicans support tax relief for low-income families, but argued that the EITC expansion could be paid for without freezing the income tax. "We can't find some room to be able to afford the EITC?" Tarr asked, suggesting other spending choices in the $38 billion budget could be revisited, while also asserting there's a $163 million surplus in the fiscal 2015 budget.

The Gloucester Republican said Democrats had a "hidden agenda" of protecting the income tax as a revenue source while also "redistributing" wealth without having to amend the Constitution to implement a graduated income tax.

Sen. Viriato deMacedo, of Plymouth, also said that senators supporting the income tax freeze would not only be violating the trust of the voters and setting up a "challenging" negotiation with the House and governor, but would be going back on what he called a "balanced plan" from 2002 to gradually reduce the income tax burden without sacrificing services.

Downing, a Pittsfield Democrat, said that since voters approved the income tax rollback at the beginning of the last decade 25 percent of the benefits flowed to top 1 percent of earners making an average annual salary of $2.57 million, and 67 percent of the tax cuts went to the top 20 percent of all income earners.

"That is the tax policy that we have in place right now in Massachusetts. If we do nothing, that status quo will remain," Downing said. "This is not about if we are going to give tax cuts here in Massachusetts. It's about how those tax cuts are delivered...It's about rewarding work and not just rewarding wealth."

Rodrigues, who said the budget amendment would guarantee a tax cut for every filer in Massachusetts next year, defended the freezing of the income tax rate.

"The voters did choose to reduce their personal income tax liability, but they were given no choice on the method. We are providing the same amount of tax relief to the voters of the Commonwealth by a different method. It's not a matter of if we provide that tax relief, but how we provide that tax relief," Rodrigues said.

To make it into law, the House would need to agree to the Senate's tax policy changes and they would need to be signed by Gov. Charlie Baker. The governor, who opposes higher taxes, and the House did not include any major tax increases or reductions in their budget proposals, and House Speaker Robert DeLeo doesn't believe the Senate should even be allowed to consider tax changes, which must originate in the House.

Gov. Baker earlier this year filed legislation to double the EITC to 30 percent of the federal tax credit, proposing to pay for the expansion by freezing the $80 million film tax credit program. He reiterated that position in a statement Tuesday from a spokeswoman who declined to say whether Baker might consider the income tax freeze.

"The Governor favors reducing the tax burden on all Massachusetts families and believes the best way to pay for his plan to boost support for low income workers is by phasing out subsidies for Hollywood movie producers," press secretary Lizzy Guyton said.

Democratic Sens. Michael Moore, James Timilty, Eileen Donoghue, Jennifer Flanagan and Ann Gobi joined with Republicans in opposing the tax amendment. Sen. Daniel Wolf, of Harwich, and Sen. Joan Lovely, of Salem, voted for both the Rodrigues-Downing amendment, and Tarr's amendment to double the EITC that did not have a financing mechanism.

Under the Democrats' plan, the average benefit for recipients of the EITC credit would jump from $315 to $470 annually. The maximum value of the EITC would rise from $937 to $1,405. The amendment would also increase the personal tax exemption for all taxpayers regardless of income by $400 to $4,800 for single individuals and by $800 to $9,600 for married couples.

Sen. Jamie Eldridge, another progressive Democrat from Acton, said Massachusetts had one of the most "regressive" tax structures in the country.

"There is not a more anti-poverty tool in this country than the earned income tax credit," Eldridge said.

Senators also backed an Eldridge amendment that would instruct the House-controlled Joint Committee on Revenue to draft legislation to restructure the film tax credit program with an eye toward limiting the total cost of the program and ensuring that more of the benefits flow toward Massachusetts businesses and workers.

Senate President Stanley Rosenberg said leaders hope any future savings generated from the restructuring of the film tax credit program could eventually be used toward a further expansion of the EITC program.

Rep. Jay Kaufman, a co-chair of the Revenue Committee, said the committee is already examining the possibility of restructuring the film tax credit.

"We've been looking at what to do with the film tax credit ever since the first hearing of the year based on the governor's proposal to eliminate it," Kaufman told the News Service. "There are conflicting reports on the efficacy of that and we have sent those reports to a series of economists to try to get a reading of which are credible and which are not and we are waiting for some feedback on those before I'm prepared to make a recommendation of what we'll do."

Massachusetts voters in 2000 passed a ballot question ordering the state income tax rate to be reduced from 5.95 percent to 5 percent. Lawmakers halted the reduction in 2002, when the rate was 5.3 percent, as part of a package of tax increases. Economic triggers have been hit in recent years, causing the income tax rate to fall to its current 5.15 percent.

Barbara Anderson, executive director of the group Citizens for Limited Taxation, called the income tax freeze to pay for the tax cuts "foolishness," suggesting that Baker had baited Democratic lawmakers when he proposed to trade the EITC expansion for the repeal of the film tax credit.

"They're just doing this to tweak the governor with the game that he started when he came up with this way too cute idea about doing a trade off," said Anderson, a driving force behind the 2000 ballot question to lower the income tax to 5 percent.

"They went the next step to throw it back at him. Let's see what we can trade with the governor before he breaks his pledge on the EITC. That's the new game," she said. "I can only hope after they've teased him they will remember it was the voters who said they wanted the income tax to go back to 5 percent."

Anderson also noted that the House showed "no interest in messing with the income tax rollback" during its budget debate, and she said doesn't think Baker will ultimately go along with a tax increase.