MA Legislature Reaches Compromise on Tax Policy

Massachusetts Governor Charlie Baker reached a compromise with Massachusetts legislature and state business leaders last week regarding the earned income tax expansion. Presently, the state earned income tax credit is 15 % of the federal tax credit. The compromise will raise that percentage to 23%, or $1,459 per family.

The agreement represents the first steps toward addressing income inequality in the commonwealth of Massachusetts. Gov. Baker has stated that the current goal is to set state credit to 30% of the federal tax credit, however the present bump in percentage will already cost the state roughly $72.5 million a year. Negotiations regarding how to pay for the earned income tax credit expansion have been ongoing for the past several months.

Initially, House-Senate negotiators proposed repealing the FAS 109 tax credit, a tax break implemented in 2008 that would lower corporate taxes for publicly traded companies with assets across multiple state lines. The FAS 109 tax credit, representing $76 million a year in tax breaks, was passed to balance changes to corporate tax reporting requirements that required companies to pay more taxes on out-of-state income.

A report submitted in 2009 predicted that over the course of six years, more than $533 million would be saved by corporations thanks to FAS 109, with $472 million going to only 14 corporations. However, with the impact of the recession, the legislature never put the credit into practice.

Business leaders in the state opposed the repeal of FAS 109 to pay for the earned income tax credit expansion, stating that the credit had been made in good faith. The repeal, they argued, would be a break in trust between business leaders and the state; and would likely hurt the credibility and predictability of the state’s business climate. In addition, it would wreck havoc for companies that stood to lose years of anticipated credit in their accounting records.

Per the compromise, the FAS 109 will be delayed an additional five years. Previously, companies had seven years to claim the deduction. They now have up to 30 years to file a claim which will limit the cost of the deduction by stretching out payment increments over a longer period of time. Governor Baker, the House, Senate, and business leaders in the state seem pleased with the agreement and the cooperation demonstrated by all parties in reaching a compromise.