GOV. CHARLIE BAKER said on Friday that he intends in November to start mailing taxpayers tax cap checks equal to an estimated 13 percent of their 2021 personal income tax liability.
An expert on the tax cap law says Baker’s move to mail out checks worth $2.94 billion before he leaves office is inconsistent with the law. But it’s unclear whether anyone will file a lawsuit in an attempt to stop him. Supporters of the law have said they back the governor’s bid to get the money back to taxpayers as soon as possible.
The biggest checks will go to those who had the greatest income tax liability in 2021. Someone with an adjusted income tax liability of $100 will get back $13, while someone with a $1,000 liability will get back $130. Those with no income tax liability will receive nothing.
To determine what you would receive, take the amount on line 32 of your Massachusetts 2021 tax return and subtract any money you received from the earned income tax credit, the senior circuit breaker, and other credits (line 43, 44, 45, 46, and 47 on your tax return). Multiply the resulting number by 13 percent and that’s the amount you would receive via check or direct deposit. Checks will go to any tax filer who paid Massachusetts income taxes in 2021, whether they live here or not. (For more details and a refund calculator, check the state’s website.)
The tax cap was approved in 1986 via a ballot question sponsored by Citizens for Limited Taxation and the Massachusetts High Technology Council. The question set a limit tied to wage and salary growth on how much tax revenue the state could take in during a given year and required returning any excess collections to taxpayers via credits on their taxes.
The tax cap has only been triggered only once before, in 1987, when $29.2 million in credits were offered to taxpayers. CommonWealth first reported on July 27 that the tax cap was about to be triggered again for the first time in 35 years – and for a lot more money. Lawmakers were caught off-guard by the tax cap, which had largely been forgotten on Beacon Hill, and the $2.94 billion eventual total cost cast some doubt on the state’s financial situation.
Baker on Friday said the state still has plenty of money on hand, enough to pass an economic development bill that contains a number of permanent tax cuts. Even after paying out the $2.94 billion and spending $840 million in a proposed supplemental budget, Baker said the state still has a surplus of $1.5 billion and $2.2 billion in American Rescue Plan Act funds.
Baker has moved quickly to return the tax cap money to taxpayers, but his approach has raised questions about whether he is operating in compliance with the law.
The tax cap law says the money must be returned as a credit and regulations that had long been in place called for a two-step process in returning the money. First, a taxpayer would calculate the size of the credit the same way the Baker administration is proposing, by multiplying 13 percent by the individual’s personal tax liability in 2021. But under the regulations the credit would be applied on the individual’s tax form for 2022, reducing any tax liability that is owed.
Baker, whose administration is in the process of scrapping the existing regulations, is proposing to do away with the second step and just send checks to taxpayers based on the 2021 calculation. In other words, the Baker administration is proposing to issue refunds instead of credits.
In the press release that went out announcing how the tax cap money would be returned, the Baker administration dealt with the shift from credit to refund by conflating the two approaches. “In general,” the press release said, “eligible taxpayers will receive a credit in the form of a refund that is approximately 13 percent of their Massachusetts Tax Year 2021 personal income tax liability.”
Peter Enrich, an attorney who worked as general counsel and counsel for revenue policy at the Executive Office for Administration and Finance in 1986 and 1987 when the tax cap law was being debated and first implemented, said the law is clear the tax cap money is distributed via credits. He said the definition of a credit is well established in tax law – credits reduce taxes that are owed and are not refunds issued by check.
Enrich said the approach being taken by Baker is very similar to what former president Donald Trump often did when he ignored laws. “It’s inconsistent with the statute and inconsistent with the constitution,” Enrich said.
Enrich said Baker should seek the Legislature’s approval to change the law if that’s what he wants to do. “The governor doesn’t just get to give away money all by himself,” he said.
Baker’s approach could impact who gets some of their tax money back. It’s very possible a person could have a tax liability in 2021 but no liability in 2022. Under Baker’s approach, that person would be sent a check. Under the original process, that person would not be able to take advantage of the credit.
Enrich and others are also questioning the size of the tax cap giveback. They note tax revenues were inflated in fiscal 2022 by a workaround to the $10,000 federal limit on state and local tax deductions that will be offset in future years by state tax credits. Enrich estimated as much as half of the $2.94 billion that exceeded the state tax cap is attributable to the workaround.
State Auditor Suzanne Bump, in certifying the $2.94 billion figure on Thursday, drew attention to the workaround’s impact but chose not to make an adjustment to the tax cap giveback.
“I would underscore for the Legislature and the public one key element in the FY22 revenue increase,” Bump said in a press release. “The change in the taxation of so-called passthrough business entities which just took effect last year generated $2.25 billion in revenue, much of which has yet to be claimed in the form of personal income tax credits and deductions by the business owners.”
Enrich said the upshot is that wealthy Massachusetts residents will receive the tax advantages of the workaround and benefit the most from the tax cap giveback, since generally those who pay more in taxes get more money back.