The fate of tax relief will now rest with a legislative negotiating committee after the Senate on Thursday stamped its unanimous approval on a nearly $590 million package.
Both the Senate and the House have voted this session on increasing tax breaks for renters, seniors and parents; lessening the taxpayer impact of the estate tax; and boosting the earned income tax credit that supports lower-income families. Depending on how quickly House and Senate leaders can iron out differences, a final proposal could be headed to Gov. Maura Healey's desk as soon as this summer.
But first, a tricky bargaining process looms for Democrats who must bridge significant differences, a challenge they did not rise to in 2022. The Senate plan is roughly half a billion dollars smaller than the House's in the long run, and differs markedly from both the House bill and one offered by Healey.
Senate Democrats rejected a Republican proposal to weave a short-term capital gains tax cut into their bill, which would have brought it into alignment with both Healey and the House's push to reduce that rate from 12% to 5%.
"This is a matter of economic competitiveness. It's one that this bill is deficient without," Minority Leader Bruce Tarr said about the short-term capital gains tax change.
Democrats contended that the measure, which the House estimated would cost up to $130 million per year once fully implemented, would unnecessarily steer benefits toward day traders and others who sell assets owned for less than a year.
Sen. Jason Lewis of Winchester called the short-term capital gains proposal "one of the most ill-advised tax cuts we can make."
"The top 1% of households in the commonwealth would receive close to 80% of the benefits of this," he said. "I don't know about you, but to me, this is outrageous when we already have such an egregious level of income and wealth inequality here in Massachusetts."
In March, Healey said that Massachusetts, Wisconsin and South Carolina are the only states that tax short-term capital gains at a higher rate than long-term capital gains.
Senators voted 5-32 to spike the amendment. Democrat Sens. Barry Finegold of Andover and Walter Timilty of Milton joined the chamber's three Republicans in support.
The Senate also rejected amendments that would have significantly expanded changes to the estate tax and indexed it to inflation as well as a House-approved proposal to tax many businesses based only on their sales within Massachusetts, rather than a combination of sales, payroll and physical presence.
One addition they made that the House has not embraced is language taking aim at what critics say is a "loophole" in the new voter-approved surtax on household income above $1 million.
A couple who together makes more than $1 million could avoid triggering the surtax by filing two separate returns, and the left-leaning Massachusetts Budget and Policy Center previously estimated the legal avoidance strategy could cut into revenues by $200 million to $600 million.
The amendment filed by Lewis, one of the primary backers of the surtax, would require married couples who file a joint federal income tax return to file a joint state tax return. Senators voted 33-5 to insert the change into their tax bill, with Finegold and Sen. Michael Moore of Millbury joining the chamber's three Republicans in opposition.
"With this change, Massachusetts would join other states in preventing this type of tax avoidance. As a result, our state's people will see greater investments in our public schools and colleges, and on our roads, bridges, and transit systems," a spokesperson for the Raise Up Massachusetts coalition, which led the successful ballot question campaign behind the surtax, said in a statement.
Over the course of Thursday's debate, Republicans described the bill as a good starting point but not expansive enough to stem the flow of Massachusetts residents moving to other states and make the Bay State a more competitive environment for businesses.
Senate Democrats pushed back on the idea that Massachusetts is losing ground to other states because of its tax policy. The bigger issue, Democrats said, is the overwhelmingly high cost of living here, from skyrocketing housing prices to some of the most expensive child care in the nation.
The Senate's tax relief bill takes aim at the housing affordability crisis in particular through a combination of credits that supporters say will incentivize production of new housing, thereby boosting supply and giving potential buyers more options.
The House and Senate bills each envision roughly the same amount of relief in the first year, but the House bill would escalate its changes over several years, eventually landing at about a $1.1 billion annual impact. The Senate bill, by contrast, would not change much from its roughly $590 million starting point.
Both branches factored the first year of costs into their fiscal year 2024 budget bills, which remain tied up in conference committee negotiations ahead of the fiscal year's start on July 1.
The tax relief proposal appears bound for a similar conference committee, likely to be helmed by the same budget chiefs already hashing out the budget.