Reforming the estate tax costs little and protects us all

LEE — It’s no secret that people keep leaving the state of Massachusetts because the costs here are so high.

Governor Maura Healey understands this.

“Too many people struggling with a high cost of living, unable to pay rent, unable to think about a down payment, unable to afford child care, gas, groceries,” Healey said, when she unveiled her state tax plan in late March. “It’s such a challenge for so many across our state — small business owners who can’t make it, and many thinking about leaving.”

She added: “Last year, there was a lot of discussion about the estate tax. I think there was a general recognition that we need to do something different in this state. We can’t be the outlier that we are because too many people leave — 100,000 people. More people will leave this week, this month. So, we need to do something.”

The governor’s testimony to the Joint Committee on Revenue spoke to the two objectives she articulated in a speech to Associated Industries of Massachusetts in January — make

Massachusetts more affordable for residents and more competitive for businesses. Her comments also underscore an immutable fact about public policy that taxes matter.

Healey’s $742 million tax package would institute a $600-per-dependent tax credit for parents and caregivers, provide relief for renters and seniors, reduce the short-term capital gains tax rate from 12 percent to 5 percent, and triple the threshold at which the estate tax kicks in to $3 million. The package represents a positive first step at a time when Massachusetts voters recently passed an income surtax that will harm both homeowners and small businesses in Berkshire County and beyond.

A survey by the Massachusetts Society of Certified Public Accountants found that 82 percent of CPAs said they have Massachusetts clients who earn more than $1 million a year and have expressed interest in leaving the Bay State in the next year. In cases in which clients said they might flee the state, 61 percent cited Massachusetts tax policy as the primary reason.

Massachusetts simply cannot afford to continue losing the businesses and people we need to drive economic prosperity. The commonwealth has lost 750,000 more people than it has gained during the past three decades and that trend is accelerating. A total of 57,292 Massachusetts residents packed their bags between July 2021 and July 2022, the fifth largest outmigration of any state in the country during that time span.

Reforming the estate tax is a simple step that costs little and protects the middle class, while preventing a flight of wealthy taxpayers from the commonwealth. Massachusetts is not just an outlier on the estate tax, but what former Revenue Commissioner Amy Pitter calls an “an outlier among outliers.”

Only 12 states and the District of Columbia even have an estate tax. Of those, Massachusetts currently shares the lowest exemption level at $1 million with Oregon. But ours is particularly bad policy as it taxes the entire estate rather than assets over the first $1 million, a process known as the “cliff” effect.

The Healey proposal would eliminate all taxes on estates of up to $3 million in net taxable value and would represent $182,000 of tax relief on larger estates. Under current law, estates with a gross value over $1 million are subject to taxation, starting at a rate of 0.8 percent and growing to a marginal rate of 16 percent.

The proposal to reduce the state tax on short-term capital gains would not have a net effect on the state budget. Capital gains taxes above a threshold of approximately $1.4 billion are not available to the budget under current law and are directed to the state’s rainy-day fund. The estimated $117 million in tax savings would help improve Massachusetts’ economic competitiveness.

Some of the proposal’s other laudable provisions:

• It doubles the statewide cap on the Apprenticeship Tax Credit to $5 million and expands eligible occupations to ensure employers in critical industries can utilize this credit.

• It expands commuter transit benefits to include regional transit passes and bike commuter expenses.

• It extends the expiring Brownfields tax credit program through 2028.

• It expands the dairy tax credit cap from $6 million to $8 million.

It’s also important to note that the commonwealth re- mains flush with money and in a good position to give taxpayers a break. State tax collections through February were $1.058 billion or 4.7 percent more than collections during the same time period in fiscal 2022 and $572 million, or 2.5 percent higher, than the year-to-date benchmark. The state also has $2.5 billion in American Rescue Plan Act funding along with surplus money.

The governor’s tax proposal and state budget will now go through the Legislature, which developed its own tax-reform proposal last year before shelving the plan as a surge in state revenues triggered an automatic $3 billion income-tax rebate. House Speaker Ronald Mariano said that he and Ways and Means Chairman Aaron Michlewitz have been discussing “alternatives” to Healey’s tax plan as they prepare the House’s fiscal year 2024 budget proposal for release and debate next month.

We’ll see how that plays out.