Governor favors scrapping biz tax to pay for EITC expansion

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By Andy Metzger and Michael Norton

STATE HOUSE, BOSTON-Hours after lawmakers unveiled an overdue state budget compromise, Gov. Charlie Baker on Wednesday morning endorsed the Legislature’s approach to jettison a corporate tax break so that low-income workers could receive larger tax credits.

The budget accord set for votes on Wednesday would permanently eliminate a tax break for multinational corporations that was enacted in 2008 and has not yet been implemented. The $76 million in annual revenue that will continue to flow into state coffers with the repeal of a tax break known as FAS-109 was cited by lawmakers as the revenue source for a substantial increase in the earned income tax credit.

“FAS-109 has never been implemented here in Massachusetts, so therefore basically taking what has been standard practice and using that as a mechanism to fund the earned income tax credit, I think that’s a good thing and I don’t believe it’s a tax increase,” Baker told reporters in the lobby of his office on Wednesday.

Baker’s position puts him at odds with a major business lobby and the former employer of Baker’s chief budgetary aide, Secretary of Administration and Finance Kristen Lepore.

Associated Industries of Massachusetts, an employer trade group that is active on Beacon Hill, said on its blog Wednesday that repealing the FAS 109 tax deduction “could harm capital-intensive national and global companies” and argued that reversing course on the promised tax policy “sends a troubling signal to employers that previous agreements on major tax policy may be changed on a whim.”

“It certainly does not help the commonwealth’s reputation for consistency on tax matters,” wrote John Regan, AIM’s executive vice president of government affairs.

AIM said it would join “other business groups” on Wednesday to recommend that Baker veto the FAS 109 repeal.

“The 2008 Combined Reporting tax law brought income from companies’ operations in other states into a unitary or “combined” Massachusetts return,” AIM reported. “The FAS 109 deduction was adopted to avoid penalizing companies after the fact for making capital investments. FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences.”

Baker, a Republican in his first year in office, had favored eliminating the state’s film tax credit to help fund an even larger expansion of the earned income tax credit.

While he has made the case in the past that businesses want a certain level of predictability and certainty in tax policy, Baker said Wednesday that the tax law changes added up to a “good deal.”

“As I’ve said many times, I don’t plan to raise taxes, but if there are opportunities to simplify the tax code, I’m going to take them. And from my point of view trading an increase in the earned income tax credit for the elimination of the film tax credit – that was a good deal in my view,” Baker said.

Taking the film tax credit out of the equation for funding the popular aid to low-income workers could spare the movie industry incentive from elimination, although film tax credit critics have persisted in their efforts. House leaders opposed the move to eliminate the tax credit that they said spurred economic development. Baker said Wednesday he’s not sure whether he’ll continue pushing for its repeal.

“That’s a decision to be made down the road,” Baker said. He said, “They told me what they thought of my idea.”

Baker said he also wanted to learn more details of a budgetary provision that allows the University of Massachusetts to retain tuition revenue. Tuition payments to the university now go into the state’s general fund. UMass spokesman Robert Connolly said the change would take effect in the 2016-2017 school year.

“Conceptually we support it,” said Baker, who said he wanted to review the details of the proposal.

Once he receives the budget the governor will have 10 days to review the annual spending bill and decide whether to veto any sections or send provisions back to the Legislature with amendment.

Shortly after taking office the governor faced an abnormally harsh winter that sidelined much of Boston’s transit service, and one of his early priorities was finding reforms to right the MBTA.

Lawmakers partially endorsed Baker’s proposal to make it easier for the T to privatize by suspending what is known as the Pacheco law at the T for three years. Baker praised House leaders for “their early interest” in providing tools to fix the T and credited the Senate with including the earned income tax credit expansion.

Suspension of the Pacheco law is likely to be more popular in the House, which included a longer Pacheco suspension in its budget, than the Senate, where Senate President Pro Tem Marc Pacheco is its chief defender.

“This wasn’t about privatizing at the T,” Baker told reporters. He said it would allow for efficiencies and better management in specific areas. Baker said late-night MBTA service costs $20 per rider and suggested that by outsourcing the provision of late-night service it “may not lose any money at all.”

Outsourcing could also provide additional personnel on commuter rail trains specifically for collecting fares, Baker said. He said the three-year window would be long enough to move forward on some privatization and he said the Legislature “wanted to test this.”

Asked about the impact of the privatization law change, Boston Carmen’s Union Local 569 President James O’Brien, who represents t workers, told the News Service, “It’s probably going to be jobs. It will probably be loss of jobs.”

“The taxpayers are going to be the ultimate ones that are going to be paying for this because it was just a checks and balance and it was transparency and it’s accountability,” said O’Brien.

O’Brien said the change in law was a “shame” and chalked it up to “the storms and because of the management failures that fell on the backs of my members and labor in general.”

Despite tax collections that are vastly outpacing estimates, state budget negotiators on Tuesday passed on an opportunity to deliver tax relief across the income spectrum by raising personal exemptions for individuals and married couples.

The $38.1 billion budget up for votes on Wednesday did not include the Senate’s plan to raise the amount of income that all taxpayers can make before being taxed.

House negotiators did not go along with a Senate plan to increase the 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.

While lawmakers are touting planned investments in local aid, substance abuse treatment and transportation, a major thrust of the new budget is to put the brakes on state spending by roughly cutting in half the spending growth rate to about 3 percent.

House budget conferee Rep. Stephen Kulik (D-Worthington) said the increased tax exemptions are “an issue we can revisit in future years as the economy continues to grow.”

“We had a very difficult budget year and we made certain decisions based on what we were able to afford and that was one of the ones that we weren’t able to do this year,” Kulik said.

The lurch towards a more conservative approach to spending comes just months after Baker and the Legislature were forced to reopen the fiscal 2015 budget, passed during an election year and Gov. Deval Patrick’s final year in office, to make major spending reductions.

“We’re trying to keep our level of spending within the margin of revenues, in fact we’re well below, because we don’t want to get into the situation like we did this year . . . when we get into the year and we find a midyear budget crisis as Governor Baker discovered when he came into office in January and we had to deal with that very quickly. So we didn’t want to overextend ourselves,” Kulik said.

The conference committee also rejected a Senate plan to freeze the income tax rate at 5.15 percent, which would have blocked potential reductions to 5 percent.