Senate Dems Get High Marks for Boldness on Earned Income Tax Credit

The more one thinks about it, the more one is struck by the strategic audacity of Mass. Senate Democrats in using the annual spring deliberations over a new state budget to push for an increase in the Earned Income Tax Credit ("tax credit"), a mechanism allowing low-income working families to significantly reduce the state income taxes they pay.  

Dems especially shook things up by committing the Senate to postponing a scheduled decrease in the state income tax rate in order to pay for the higher tax credit.

Today, two days into Fiscal Year 2016 (7/1/15-6/30/16), we are awaiting the final legislative version of the FY 16 state budget from a House-Senate conference committee.  It appears that the disagreement between the branches over how and when to move forward on the tax credit increase, and on how to pay for the increase, is a major reason why, for the first time in six years, the legislature has not met a June 30 deadline for producing a new budget, and why state government is now functioning under an interim, stopgap, one-month budget.

In May, the Senate adopted an amendment to its version of the budget calling for a 50% increase in the tax credit.  By contrast, in April, the House chose not to do anything on the tax credit when crafting its version of the budget.  (Most members of the House favor hiking the tax credit; they just didn't see the budget as the vehicle for accomplishing it.) 

A tax credit represents a dollar-for-dollar reduction in one’s taxes.  For example, if a wage earner qualified for a $200 tax credit and was otherwise liable to pay $1,000, she would pay $800 instead.  So, if the state raised the tax credit limit by 50%, she’d pay $700.

Should the full legislature vote to raise the tax credit by 50%, and should the governor sign the increase into law, the state would stand to forfeit an estimated $145 million in income tax revenue the first year the higher tax credit is in effect. That amount would be in addition to revenue already foregone due to this particular tax credit.

Approximately 400,000 low-income families qualify for this benefit. If a 50% increase in the tax credit becomes law, each of those 400,000 families would, on average, get an additional $500 back on their taxes every year.

A digression on the budget-making process seems in order at this point…

Each branch of the legislature constructs a separate version of the new budget.  Once the Senate completes its version, a six member House-Senate conference committee is set up to work out the difference between the versions and to offer up a final, unified budget.  Almost always, this unified budget is quickly approved by the House and Senate.  Then the governor gets his hands on it.  With the assistance of his staff and cabinet, the governor goes through the budget, line by line and section  by section, vetoing the parts he disapproves of.  He then sends it back to the legislature, which reviews everything the governor has done and decides whether to accept the vetoes or to conduct override votes on them.  At least a two-thirds majority in both branches must vote to override any and each vetoed item for that item to remain in the budget, that is, to become law.  The override votes comprise the final step in the months-long process. 

...In the budget conference committee, the big question now lurking over the tax credit actually consists of three separate but related questions: 

First, is the House, as the originator by state constitution of all tax measures, willing to abandon its position that the budget is not the proper vehicle this year for increasing the tax credit?

Second, will the House go along with the Senate’s controversial approach to funding the increase by delaying a voter-mandated reduction in the state income tax rate from 5.15% to 5.1%, a reduction now set for implementation on Jan. 1, 2016?  (Remember, the increase would put a $145 million hole in the budget, a gap that must be filled with revenue from some other source to keep the overall $38-billion-plus state budget in balance.)  

Third, if the House accedes to the Senate on its approach to enacting and paying for the tax credit hike, will the governor, even though he strongly supports the hike, veto the budget section accomplishing that because he does not want to thwart the will of the voters?

Hard to believe the issue of lowering the income tax has been around for 15 years. 

It was in the year 2000 that voters approved a statewide ballot question requiring a gradual lowering of the income tax rate from 5.95% to 5%.  We’ve been hearing the words “voter-mandated reduction in the income tax” so long we've forgotten when we first heard them.

In 2002, the state was in a budget crunch and the legislature decided to stop, and to freeze, at 5.3%, the ongoing fall in the income tax rate.  The legislature also set up then a system of annual benchmarks concerning overall growth of state revenue.  Under that system, when benchmarks were hit -- as they have been hit in recent years -- the rate would be lowered in increments of .05%, per achieved benchmark.  That’s how we got to the current rate of 5.15%, and how we were on track to go to 5.1% in January: revenue has been growing at a good clip in recent years.

My guess is the conference committee will not include the tax credit increase in the final legislative budget because House leaders are not happy the Senate dealt with the issue this way. 

Don't forget that the House attempted, unsuccessfully, to get the state Supreme Judicial Court to rule that the Senate had overstepped its bounds when it tinkered with the income tax rate during the budget process.  That defeat has likely inspired the House to dig its heels in deeper on the subject now.

If it turns out I'm wrong, that the House conferees do accede to their Senate counterparts, I suspect the governor would veto the increase in the final legislative budget, despite having come out early in support of an increase.  He’ll veto it because:

One, he prefers to eliminate the state’s film tax credit as a way of covering the gap created by augmenting the Earned Income Tax Credit.

Two, he has always supported reducing the income tax rate to 5% and will not countenance a detour on the way to 5%.  (One has to wonder if the Senate Democrats didn't undertake this maneuver in part to put the governor into an uncomfortable spot -- to force him into a high-profile choice between a higher Earned Income Tax Credit and a reduction in the income tax?)

Three, he opposes all tax increases.

Four, he will not want to contravene the 2000 verdict of the voters on lowering the income tax, even though a plausible argument can be made that putting off an income tax cut is not the same as increasing the income tax.

That argument is, almost certainly, a non-starter with Charlie Baker.

NEXT:  House Dems Foil Senate Dems in Budget Conference Committee.