With Massachusetts on track to end the year with a multibillion-dollar surplus, Gov. Charlie Baker on Wednesday proposed a two-month sales tax holiday that would give consumers a break from the state’s 6.25 percent sales tax in August and September, in an effort to drive shoppers to local businesses.
The major tax relief proposal would cost the state an estimated $900 million in forgone revenue, but the Republican governor said it also would be a way for the state to show appreciation to business owners and consumers who have contributed to the surplus by finding ways to support each other during the COVID-19 pandemic.
Baker said he would file legislation Wednesday to expand the annual sales tax holiday from a two-day weekend in August to a two-month event, believing that it would help give the state’s economy “some momentum as we come out of this sort of pandemic doldrums that we’ve been in.”
As it stands now, the tax-free holiday has been set for the weekend of Aug. 14-15.
“It would be a really big deal, not just for taxpayers, but also for all those Main Street businesses that have really had it probably toughest of all on the economic side since the beginning of the pandemic,” Baker said during a Statehouse news conference.
Through May, the state had collected more than $3.9 billion in excess of projections for the fiscal year, and that trend has continued in June, with the Department of Revenue reporting that, through the middle of the month, the state already had collected 80 percent of what it expected for the full month.
Baker hesitated to make a guess on how large the surplus will be when the fiscal year ends June 30 and the books are balanced, but he said it was clear that there would be “significant” excess revenue to be spent, saved or returned to taxpayers.
“It’s also a way for us to say, as I think we should, thank you to all the people who created that tax revenue through their creativity and imagination over the course of the last year,” Baker said.
To take effect, the proposal would need to get through the Democrat-controlled Legislature, where lawmakers in the House and Senate already were questioning the governor’s decision to prioritize tax relief over investments in things like student debt relief or public transit.
Several said the developing surplus should instead be put toward public investments, including state Sen. Adam Hinds, D-Pittsfield, who said the surplus and federal aid should be put toward investments in child care and higher education.
“Instead of offering crucial investments in childcare affordability or higher ed,” Hinds tweeted, “@MassGovernor prefers to ignore the once in a generation opportunity provided by state surpluses & federal dollars to start fixing our flawed systems highlighted during COVID.”
State Rep. Tricia Farley-Bouvier, D-Pittsfield, said “this is not the time” to give up revenue, citing needs of school districts as well as those of residents struggling with food insecurity and unemployment.
But, two Berkshire County representatives said that possible benefits to consumers and small businesses would make an extended sales tax holiday worth exploring, although they said two months might be too long for an extended holiday.
A monthlong tax holiday would be “a good compromise to help small businesses and people,” said state Rep. John Barrett III, D-North Adams. While two months might lead to excessive revenue loss, a sales tax-free month could “help jump-start the economy for small businesses” and draw out-of-state purchasers, said state Rep. William “Smitty” Pignatelli, D-Lenox.
Online, most of the Democratic responses expressed opposition to Baker’s idea.
“There is no evidence that we need to incentivize purchasing. Consumer demand is high. Instead of an extended sales tax holiday, let’s put funds towards our future: relieve student debt, support public higher education, address rent relief post-pandemic. I could make a long list,” tweeted state Rep. Mindy Domb, D-Amherst.
“Or we could fix the T, repair our crumbling bridges, reduce class sizes, and pay down our debt,” tweeted Sen. Eric Lesser, D-Longmeadow.
And Brookline Rep. Tommy Vitolo said the money would be better spent on transit, education, housing, state and local government, building energy efficiency or paying down pension debt.
“C’mon, man,” Vitolo tweeted.
While some legislators might be skeptical of the plan, Retailers Association of Massachusetts President Jon Hurst called it a “great idea.”
“It’s a great progressive pro-consumer and pro-small business concept,” Hurst said. “This would be good for consumers, good for businesses, and the icing on the cake would be that New Hampshire would hate it.”
Hurst said that despite the strength of consumer activity during the pandemic, a large portion of money spent by Massachusetts consumers went out of state for online purchases that could be delivered to a shopper’s door, and not to local businesses.
“This could be a really important reminder to our consumers that they need to shop like jobs depend on it,” Hurst said, “because quite frankly, they do.”
The idea also received a thumbs-up from the head of a retail group in the Berkshires.
“It’s been pretty busy here, and we’ve been pretty lucky, but I think anything that the governor can do to entice people into the stores to support our local businesses is a powerful thing,” said Betsy Andrus, executive director of the Southern Berkshire Chamber of Commerce in Great Barrington.
Lt. Gov. Karyn Polito, who joined Baker at the news conference, said the sales tax relief would be felt the most in low-income communities where residents pay larger portions of their household income on sales taxes.
Under Baker’s plan, the governor said the Massachusetts Bay Transportation Authority and the School Building Authority would see see their budgets impacted by the tax holiday. Both agencies receive a dedicated portion of every dollar in sales taxes collected by Massachusetts.
The traditional August sales tax holiday applies to purchases of less than $2,500, and does not extend to meals, motor vehicles, boats, telecommunications services, utilities, tobacco, marijuana or alcohol.
Another chunk of the surplus is expected to find its way into savings.
The Department of Revenue on Tuesday certified for the comptroller $2.3 billion in capital gains taxes collected so far in fiscal 2021, which exceeds a threshold set by state law resulting in an automatic transfer of $852 million to the state’s stabilization fund. That transfer, the administration said, pushed the balance in the state’s “rainy day” fund to $4.3 billion.
In 2019, when the state previously ended a fiscal year with a surplus, Baker proposed a mix of tax relief and new spending, including $175 million to expand for two years a dependent tax credit for families with children and those who care for elderly or disabled relatives.
The House and Senate, though, did not go along with his plan.
While it remains to be seen how legislative leadership will react to this latest tax proposal, the governor has been at odds with the Legislature over how and how quickly to spend more than $5 billion in federal relief aid.
Last week, Baker proposed to immediately spend more than half of the money the state received through the American Rescue Plan Act, or about $2.8 billion, on a combination of housing, job training, water and sewer infrastructure and other priorities.
The remainder of the money, he suggested, could become part of a more deliberative process guided by the Legislature as it sorts through ideas for how best to spend the one-time aid.
That plan, though, was rejected by the House on Tuesday, and Democratic leaders said they instead want to hold a series of hearings over the next few months to gather input from lawmakers and others about how about $4.89 billion should be used.
”We know that our colleagues in the Legislature are working their process on our proposal, but we remain committed to taking quick action to put these federal dollars to work and will continue to pursue this plan to invest in these crucial priorities in the communities that were hit hardest by the pandemic,” Baker said.
The governor would not say whether he would veto the bill working its way back to his desk to give the Legislature more control over the funding, or if he would seek to commit some of the money before it gets swept into an account beyond his reach to spend without legislative approval.
”I think we made a pretty clear statement in the proposal that we made that we want to be collaborative on this one,” Baker said.
Eagle staff writers Tony Dobrowolski and Danny Jin contributed to this report.