$409M In Tax Changes: See How Mass. Senate Proposed New Revenue

By Colin A. Young, State House News Service

BOSTON, MA — Without raising existing tax rates, the Massachusetts Senate projects that it could generate an additional $409 million in tax revenue in fiscal year 2018 by applying existing taxes to new payers, changing how the state collects some taxes, and taking other steps.

The Senate budget released Tuesday morning by the Committee on Ways and Means calls for the state to levy a 5 percent excise tax upon all short-term room rentals through websites like Airbnb and VRBO, a proposal that the committee estimates would generate $18 million in annual revenue.

The roughly $40.3 billion spending plan also includes $30 million in new revenue from changing how the state collects sales taxes from online retailers and $125 million from a change in when companies remit sales, room occupancy, and meals taxes to the state.

By building on new tax revenues approved in the House budget, the Senate budget all but ensures that Gov. Charlie Baker will face tax policy decisions when a budget reaches his desk, probably sometime in late June or early July. Baker says he opposes new taxes, but has also aired tax proposals of his own.

Senate Minority Leader Bruce Tarr, a Gloucester Republican, acknowledged Massachusetts is facing "serious issues with our state's revenue collections and an uncertain future for those collections in the current year and the one to follow" and said Senate Republicans will carefully examine the proposals.

"The proposed budget relies on some significant tax changes that warrant careful thought and analysis before approval," Tarr, who has opposed tax increases over the years, said in a statement. "We must be attentive to any potential negative impacts or unintended consequences of these changes, and we will carefully examine them."

While the state budget appears on track to eclipse $40 billion in spending for the first time, lawmakers say they've had to hold spending increases down.

Sen. Patricia Jehlen, the assistant vice chair of the Senate Ways and Means Committee, said the Senate budget proposal demonstrates a lack of sufficient resources and "shows we have a revenue problem and not a spending problem."

"The House, the governor and the Senate all recognize for the first time that we need new revenue, and the Ways and Means budget makes steps to increase that revenue modestly," Jehlen said Tuesday.

In his budget proposal, Gov. Charlie Baker recommended applying the state's room occupancy tax to anyone who provides 150 days or more of accommodation in a calendar year, which he estimated would generate $12 million in fiscal 2018.

The Senate plan calls for the tax to be applied to room rentals of any length, generating an additional $6 million in revenue by dropping the governor's 150-day threshold. The Senate proposal also allows municipalities to impose a local option tax of up to 6 percent (6.5 percent in Boston) on short-term rentals.

"On day one, the sales tax would be charged similar to like a hotel room," Senate Ways and Means Chairwoman Karen Spilka said Tuesday. She added, "When you rent a hotel room for a day you pay tax on it."

If the Senate passes a budget that includes taxing short-term rentals, it will set up a conflict between the House and Senate budgets that would have to be ironed out during closed-door conference committee negotiations.

The House budget shied away from beginning to apply the tax to short-term rentals, and House Ways and Means Chairman Brian Dempsey said his committee preferred to let bills dealing with the issue wind their way through the legislative process and "stay away from any potential revenue there."

Last week, the Committee on Financial Services announced it will hold three hearings around Massachusetts to hear from people about the potential impact of short-term rental taxes on tourism and the rental market.

Rep. Aaron Michlewitz, who chairs the committee, has filed legislation that would not only implement a tax structure for short-term room rentals, but address insurance requirements and safety precautions.

After the Baker administration reported in early May that tax collections through April were trailing downgraded fiscal 2017 estimates by $462 million, Airbnb wrote to Senate President Stanley Rosenberg reminding him that the company was willing to begin collecting room taxes on units rented through its website to help with the budget situation.

The Senate also expects Massachusetts to collect an additional $7 million in fiscal 2018 by taxing internet-based room resellers, like TripAdvisor or Expedia, that buy hotel rooms in bulk and then sell them at a higher price.

"When they sell them one by one they jack up the prices," Spilka said. "They pay tax on the bulk sales, but not what you and I would pay on the increase, so we're taxing that as well."

The Senate is also counting on a one-time collection of $125 million in tax revenue but is giving the administration two options for how to effectuate that collection. Baker's budget proposed requiring third party credit card processors to remit sales, room occupancy and meals taxes to the state on a daily basis, instead of holding it in a trust for up to 50 days as is the current practice.

Spilka said the Senate Ways and Means Committee talked to businesses that were concerned about the governor's "accelerated" sales tax idea, so the Senate's budget directs the administration to either pursue accelerated sales tax collection or devise a sales tax prepayment system.

Either change would shift the timing of tax collections, resulting in a one-time lump sum of $125 million in fiscal year 2018.

The Senate also goes along with Baker's plan to begin to collect sales tax from online retailers who do not have a physical location in Massachusetts but do more than $500,000 in sales in the Bay State annually. The change is expected to yield $30 million in revenue next fiscal year, according to the administration.

Another $20 million in revenue is expected from a Department of Revenue change that will require credit card companies to provide a 1099-K form to individuals who earn more than $600 from credit or debit card transactions in a calendar year. The current threshold for a 1099-K form is $20,000 in income from 200 or more transactions in a year.

Though Rosenberg on Monday said he is concerned about the "revenue drain" on the state budget and has recently floated the idea of implementing a tax on services, the Senate's plan does not stray too far from the new revenues already included in the governor's or the House budgets.

"I really do believe we're going to have a much bigger discussion about revenues," Rosenberg said Monday. "It starts with closing loopholes and it continues with modernizing the system so it's a 21st-century tax code for a 21st-century economy. Right now we're still operating on a 20th-century tax code and we cannot support what this commonwealth needs."

Senators may add tax-raising or tax-reducing proposals to the Senate budget through floor amendments. On Thursday at 5 p.m. - the deadline for amendments - the tax policy agendas of senators for next week's budget will become clearer. Budget debate begins in the Senate on Tuesday, May 23.