The Trojan Horse Threatening Taxpayer Refunds

Providing tax relief can be an Odyssean task, with each step forward met by a new obstacle. Now, the Commonwealth faces yet another challenge.

The latest plot twist is a Trojan Horse from the Massachusetts Senate. It comes in the form of an amendment to the state’s economic development bill. On its face, the policy looks harmless. But a deep dive shows it could sabotage efforts to deliver more refunds to taxpayers and essentially act as a backdoor repeal for our state’s existing revenue growth limit. 

Let’s take a closer look.

Undermining The Original Intent Behind Chapter 62F

Last week, the state Senate passed an amendment within a larger economic development package that would defang the state’s limit on how much the state can collect in tax revenues (called Chapter 62F). This revenue growth limit, which was voted into law by taxpayers 40 years ago, dictates an annual limit on how much the state can collect in revenue. The limit grows every year based on wage and salary growth. Current law says anything in excess of this limit must be returned to taxpayers, which most recently occurred in 2022 (when $3 billion was returned).

The Senate’s change would add a new hurdle to refunding taxpayers, through a new “test” to determine whether revenue collected above that limit would actually be returned to the taxpayers (as the current law requires).

Under the new calculation, revenue must be higher than 7.5% of the state’s total personal income in that fiscal year to issue refunds. This change would make it unlikely that Massachusetts would ever issue taxpayers a refund, even when the state collects more revenue than the growth limit allows. 

An Artificial Restriction on Taxpayer Refunds

Looking at recent history demonstrates why this arbitrary 7.5% proposal seems intentionally designed to put taxpayer refunds out of reach. 

If this provision had been in place in the last four decades of Chapter 62F, the refund triggered in 2022 would not have been returned to taxpayers, even though tax revenues exceeded the state’s limit by roughly $3 billion. In fact, the last time Massachusetts’ tax collections hit that ratio was in 1987, the first year the revenue limit was implemented.

The revenue limit was put in place to establish reasonable guardrails on the growth in state revenue, and therefore state spending. But for the revenue growth limit to be effective, it has to be calculated responsibly.

The existing limit attempts to do this by tying the revenue limit to growth in wages and salaries. A proposed ballot measure would further strengthen the limit by applying growth to the previous year’s actual tax collections, plus wage and salary growth. According to an MOA poll of Massachusetts voters, nearly three-fourths support this change.

Adding a new component to the limit that is tied to personal income growth – which includes non-paycheck earnings such as investment, property, and Social Security income – creates a vastly inflated threshold to reach in order for taxpayers to see refunds. In 2026, for example, the Senate amendment says the state would have to collect over $52 billion in tax revenues before it could issue refunds to taxpayers – roughly $9 billion more than we’re anticipated to collect. 

The proponents of this change claim that the reform respects the will of the voters that originally passed the revenue growth limit. The reality is that this language, if it becomes law, effectively scraps the state’s longstanding requirement to rein in tax collections and could impact any future reforms that return excess funds to taxpayers.

Bucking The Responsible Revenue Trend Nationwide

Having an effective limit on how much revenue the state is allowed to collect is not a novel concept. In fact, 15 states have some sort of limit on how much they can collect in taxes. Twenty-four states place a limit on how much they can spend.

That includes blue states like Colorado, Oregon, and California. Even neighboring Maine limits revenue collections and refunds its taxpayers.

Yet the Massachusetts Senate’s proposal could be the most extreme handicap of these revenue limits. Most states require some additional criteria to trigger refunds to taxpayers. But the proposed requirement that tax collections exceed 7.5% of personal income would create the highest barrier to issuing refunds in the country.

Conclusion

While a large majority of Massachusetts voters are concerned about the state’s steep tax burden, the new change flies in the face of those who say they need relief. 

Instead, this Senate amendment means the state gets to keep more tax dollars even if it exceeds the lawfully allowable amount, while taxpayers are footing a higher and higher tax bill every year. This reduces accountability for sustainable revenue and spending growth, and could reduce future refunds to taxpayers.

Now that the Senate has approved this language, it will go with the entire economic development bill to a joint conference committee to iron out the details. This committee could keep or alter the Chapter 62F amendment within the larger bill, or scrap it entirely. The latter would be an important step to protecting fiscal responsibility and taxpayers’ hard-earned dollars as residents are increasingly worried about high taxes.