Cap to give ‘north of $2.5b’ in excess tax revenue back to taxpayers

Estimates run as high as $3.2b; Baker says state can afford it

GOV. CHARLIE BAKER said on Thursday that he expects a law passed by voters in 1986 will require the state to return more than $2.5 billion to taxpayers in the coming year.

The governor sounded definitive, but officials in his administration and from the Pioneer Institute think tank suggested the amount of money to be returned may even be higher. The Department of Revenue is projecting the giveback at $2.97 billion and Mary Connaughton, the chief operating officer of the Pioneer Institute, estimated $3.2 billion.

The so-called tax cap law was intended to limit how much tax revenue the state could take in during any given year. It’s only been triggered once, in 1987, so over time it faded from memory and was largely forgotten.

Now, with tax revenues rising 20 percent in the most recent fiscal year, according to the governor, the state will have to return “north of $2.5 billion” to taxpayers, Baker said. The money will be returned on a proportional basis, meaning those who paid the most income tax on their 2021 tax return will get the most back. The Baker administration estimated 7 percent of the amount of taxes paid in 2021 would be returned. Someone with taxable income of $75,000, for example, would receive about $250 back.

Baker said the state can easily afford the tax cap giveback along with the package of roughly $1 billion in permanent tax cuts and one-time $250 cash rebates that is working its way through the Legislature now.

“The tax breaks that are currently pending before the Legislature are eminently affordable,” Baker said after signing the fiscal 2023 budget in his office. “These are sort of unprecedented increases in tax revenue, which in some ways is exactly what this thing [the tax cap] was designed to do to insure that people in Massachusetts participated in this windfall.”

Baker said his staff had been tracking the tax cap issue as part of its effort to wrap up fiscal matters for the latest fiscal year, but the news, first reported by CommonWealth, appeared to catch most of Beacon Hill by surprise.

“This was on nobody’s radar,” said Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University.

Legislative leaders indicated they were caught off guard, State House News Service reported. The budget experts in the House and Senate, Rep. Aaron Michlewitz of Boston and Sen. Michael Rodrigues of Westport, said the tax cap giveback raises a lot of questions.  “I definitely think it puts everything back on the table for conversation on exactly what we can afford or can’t afford going forward,” said Michlewitz.

Rodrigues and Michlewitz did not rule out tinkering with aspects of the 1986 law. “We haven’t gotten to that point to make any decisions yet,” Rodrigues said when asked if changes to the tax cap were under consideration. “Remember, the administration just discovered and informed us about this literally days ago.”

Like the governor, Horowitz said he believes the state can afford the tax cap giveback, the tax cut package, and a spending increase of 9.3 percent in the current fiscal year because tax revenues have been so strong, the prospect of a recession on the horizon notwithstanding.

It was a little unclear how the tax cap money will be returned to taxpayers. Baker indicated he would prefer a rebate check, while his top budget aide pointed out that the last time the tax cap was triggered in 1986 it was returned as a credit on each taxpayer’s tax return.

Horowitz said the tax cap is being triggered partly because of the “flukey” way it is designed. The law establishes an “allowable amount” of tax revenue by taking the allowable amount from the previous year and multiplying it by the average of the percentage growth in total wages and salaries in Massachusetts over the three previous years. Any revenue above the allowable amount must be returned to taxpayers.

Horowitz pointed out that revenues are soaring right now but wage and salary growth is lagging a bit by using the average of the three previous years.  Wage and salary growth increased 11 percent in 2021, went down nearly 1 percent in 2020 during COVID, and up  6 percent in 2019.

“The cap is just way too low,” Horowitz said. “It’s giving a weird answer this year.”

The actual tax cap giveback won’t be known until the Baker administration releases revenue numbers for the month of June, the final month of fiscal 2022, and the state auditor certifies the exact tax cap number in September.

Connaughton, at the conservative-leaning Pioneer Institute, said she used a conservative estimate for June revenues and came away with the $3.2 billion figure.

“What this shows is that the taxpayers have been maxed out and they are about to get a startling return,” Connaughton said.