THE BAKER ADMINISTRATION is preparing to change the rules for returning about $3 billion in tax revenue so the governor can send checks to Massachusetts taxpayers before he leaves office in January.
But a legal expert, citing a 1987 Supreme Court decision, says Gov. Charlie Baker’s proposed changes appear to violate the voter-approved Excess Tax Collection Act and the constitutional prohibition on allocating funds on voting issues.
The governor’s move to change the rules suggests he’s eager to get the money back to taxpayers as soon as possible, perhaps to claim credit for returning the money or return it before lawmakers take action may, to tamper with the law or prevent all the funds from going out.
The tax ceiling was approved in 1986 via a poll sponsored by Citizens for Limited Taxation and the Massachusetts High Technology Council. The question set a limit on how much tax revenue the state could collect in any given year and called for the return of excess revenue to taxpayers through credits on their taxes.
The law was triggered only once, in 1987, and has largely faded from public view over time. This situation changed on July 27 when Commonwealth reported that the law would be triggered again this year for the first time in 35 years.
The news took most of Beacon Hill by surprise, but the Baker administration was aware of the situation. The governor announced this a day later commonwealth’s report that the return of the tax ceiling “north of $2.5 billion‘ a figure his administration later in the day increased to $2.9 billion.
The exact amount of the reimbursement of the upper tax limit will only be known when the state auditor has determined the number in mid-September. But the governor and his administration have been busy making plans to return the money to taxpayers.
During a brief scramble with reporters on Tuesday, Baker made his most detailed statement yet about the money’s return.
“We have already begun working with the Treasury Department to ensure these refunds are passed on to taxpayers as soon as possible,” he said. “And I think at this point, we expect people to start getting their refunds sometime between late November and early December.”
The governor used the term refunds, meaning the money would be returned to taxpayers in the form of checks.
But the Tax Cap Act says the money should be returned to taxpayers as a credit on their 2022 tax forms, which won’t be available until next year.
The Tax Cap Act, known in Legislative parlance as 62F, and the accompanying regulations determine how the loan works. For example, if the excess tax revenue is $3 billion, the laws and regulations require the Treasury Department to determine what percentage of the state’s total tax revenue in 2021 is $3 billion.
This percentage is then used by each taxpayer to determine how much of their individual 2021 tax payment should be returned as a credit, but the credit can only be offset against the individual’s 2022 tax liability.
It’s a two-step process, meaning taxpayers would see no benefit until 2023, after Baker left office. [CORRECTION: An earlier version of this story mistakenly said 2022 instead of 2023.]
Baker administration officials are making efforts to expedite the process of repaying the funds. In April, well before the notion that the tax cap might be triggered became public, the Treasury Department released a notice that it intended to repeal the existing regulation detailing the two-step process for returning excess tax revenue to taxpayers.
“This regulation is repealed because it is obsolete; Credit has not been required since 1987 hearing notice said. “When a credit becomes available, DOR will issue guidance and update forms specific to the year in which the credit is allowed.”
At the May 12 hearing, no public comments were made on the repeal of the ordinance.
In a statement, officials at the Management and Finance Executive Bureau said they have not yet completed the procedure to lift the ordinance, but would do so once the examiner confirms that 62F had been triggered.
“The language in the 62F Statute does not define the term “credit” or address the issue of the implementation mechanism; Therefore, we have the flexibility to determine the best mechanism in any given year. DOR will issue guidelines which will determine the payment mechanism when it is determined that the F62 cap has been reached for FY22,” the statement said.
But Peter Enrich, a lawyer who worked as general counsel and tax policy adviser at the Executive Office of Administration and Finance in 1986 and 1987 when the Tax Cap Act was being debated and implemented, said the Baker administration’s stance appeared to contradict the law.
He said the meaning of the term “credit” is not specified in the 62F Act, but the meaning is well established in tax law — credit reduces taxes owed; they are not refunds issued by check. “There is not a single exception to this,” said Enrich.
Enrich said the 1986 law spelled out the two-year process for returning the money, and a 1987 Supreme Court decision dealing with the tax ceiling also spelled out clearly how the credit is calculated and repaid.
Christopher Anderson, the president of the Massachusetts High Technology Council, said the poll question was specifically created using a credit to avoid being considered an appropriation, which the state constitution cannot include in a poll question.
Anderson said he would like the tax cap money to be returned sooner, in part to stave off any efforts to rig the tax cap that may emerge next year.
But Anderson said he wanted to learn more about the legal and logistical issues involved. Perhaps the Baker administration could argue that residents paid too much money in taxes and the state is only paying back the overpayments, he said.
Enrich said the Supreme Court ruled in 1987 that the tax cap was not appropriation because it only reduced taxes paid by taxpayers and did not give them money directly.
“There is no authority to use funds from the Commonwealth Treasury to send funds back to the people,” Enrich said.
House Speaker Ron Mariano issued a warning.
“In light of the potential regulatory changes for payout being discussed by the administration, it is evident that there is still a significant level of uncertainty and unanswered questions regarding the specifics of 62F, which is precisely why we are cautious and need to understand all the facts before we make these important decisions,” he said.