$876m Mass. tax workaround set in motion
Will help some wealthy residents recover lucrative tax break
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.
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.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.