State government

$876m Mass. tax workaround set in motion

Will help some wealthy residents recover lucrative tax break

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A TAX CHANGE designed to help some wealthy Massachusetts residents recover a portion of a lucrative federal tax break they lost four years ago kicked into gear in December, when a group of so-called pass-through businesses paid $876 million in excise taxes to the state.

The figure was disclosed in a Department of Revenue press release issued on Wednesday detailing the state’s tax take for December. 

With pass-through businesses, including S corporations, limited liability companies, and some trusts, income flows through the company to the owner or shareholder, who traditionally paid income tax to Massachusetts on the money earned.  

Up until four years ago, the business owners who itemized could deduct all of the Massachusetts income taxes they paid (as well as their property taxes) on their federal tax returns. But the so-called state and local tax deduction, or SALT deduction, was capped at $10,000 in 2017 to help pay for tax cuts sought by President Trump that benefited the wealthy and large corporations. 

Massachusetts last year approved a work-around to restore the deduction for taxpayers associated with pass-through businesses. Instead of the owner or shareholder of the pass-through business making the tax payments, the new Massachusetts law allowed the pass-through companies themselves to pay an equivalent excise tax, which under federal law would be fully deductible on the company’s federal tax return. 

Since the workaround didn’t gain final approval until September, the owners of the pass-through businesses made estimated tax payments of roughly $876 million during 2021 and now will be able to claim most of that money as a refund. 

Gov. Charlie Baker and the Legislature disagreed on how big the refund should be. Baker wanted all the money returned to the business owners, and twice vetoed provisions that would return only 90 percent. Lawmakers overrode his veto both times, and now the business owners will get refunds totaling $784 million and the state will retain nearly $88 million. State lawmakers were counting on $90 million in their budget for this year.

More than 20 other states have approved similar workarounds. 

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Bruce Mohl

Editor, CommonWealth
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About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

The Massachusetts workaround dramatically inflated the state’s tax take in December, but the Department of Revenue adjusted the numbers to reflect refunds that will be going out to owners of pass-through businesses later this year.

Even with the adjustments, tax revenues in December continued their upward trajectory. Collections were $520 million, or 18.3 percent, above December 2020 levels and $635 million, or 23.3 percent, above the state’s revenue forecast. For the first six months of the fiscal year, the state has collected $17.8 billion, 24.8 percent above year-ago levels and more than $2 billion higher than the benchmark forecast.

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