PROVINCETOWN — In a break with the last 35 years of state budgeting, $2.9 billion will be mailed back to income-tax payers in Massachusetts in direct proportion to their 2021 income tax payments. The checks will begin arriving in the mail next month.
That $2.9 billion is an enormous sum of money, even in the context of a state budget. For instance, it is about a third of the entire year’s sales tax receipts, which were $8.8 billion.
The rebates are happening because of a citizen petition that passed in 1986 creating a law called Chapter 62F. The law has resulted in a rebate only once since then, in 1987, when $29 million went back to taxpayers.
Once triggered, Chapter 62F requires that all receipts above the “allowable increase” be rebated to people who paid income tax. This leaves out many taxpayers who mostly pay sales tax, according to Jason Wright of the Mass. Budget and Policy Center, a nonprofit think tank focused on economic equity.
“Our tax system is upside-down, meaning that people at the lower end of the income distribution pay more as a percentage of their income in taxes” than wealthier people do, Wright said, largely because of fees and sales taxes. Those taxpayers will mostly get nothing from 62F.
MassBudget estimates that the bottom 20 percent of households by income will get three-tenths of a percent of the $2.9 billion in 62F rebates this fall. The top 20 percent will get 73 percent of the money. A hypothetical taxpayer with income of $1 million would get $22,387, while a taxpayer with $31,000 in income might get $208.
Nancy Wagman, another MassBudget analyst, said one reason the law was triggered is that the 62F law does not actually target budget surpluses. Instead, it takes effect when tax receipts rise significantly faster than salaries and wages do.
This is a problem, said Wright, because the formula for “salaries and wages” excludes a lot of income in the state, including gains in the stock market, from selling a home, or from unemployment income. Those other sources of personal income help push up state income tax and sales tax receipts, which are one side of 62F’s formula, but don’t affect the “salaries and wages” on the other side of the equation.
This year’s $2.9 billion distribution is comparable in scale to the major federal aid programs of the last two years. The CARES Act of 2020 gave the state a $2.7-billion Coronavirus Relief Fund, much of which went to small business grants, aid to hospitals, and expenditures on testing, contact tracing, and personal protective equipment.
Last December, the state passed a $4-billion spending bill that combined $2.5 billion in federal American Rescue Plan Act money with $1.5 billion in surplus tax receipts.
That bill took months to negotiate. Among its major expenditures were half a billion to replenish the state’s unemployment insurance trust fund, half a billion for $500 direct payments to frontline workers, $600 million for state housing programs, and $400 million for mental and behavioral health care.
Local leaders have said that extra housing money means that affordable housing projects like those at the VFW parcel in Provincetown, the Cloverleaf parcel in Truro, and 95 Lawrence Road in Wellfleet have a much better chance of winning state funding in their first lottery round this coming January — rather than having to wait for a second or third year’s lottery, as often was the case in the past.
The legislature was finalizing a large economic development bill last summer when officials in Gov. Charlie Baker’s administration revealed the news: the nearly forgotten Chapter 62F would apply to that fiscal year, and $2.9 billion that the legislature had been preparing to spend would go to rebates instead.
The State House News Service reported that the governor’s staff had quietly filed to amend the 62F rebate procedures in April and held a public hearing that generated no comments in May. Baker’s administration did not alert legislators until the very last days of the legislative session in July, however. Commonwealth magazine was, in July, the first to report that the 62F provision had been triggered.
This is not how the legislature and governor had planned to spend $2.9 billion, said Cape and Islands state Sen. Julian Cyr.
The economic development bill and tax relief package that was about to pass included direct payments of $500 to middle-income households, Cyr said, and an increase to the child tax credit claimed by parents. There was also an increase in the deduction that renters can take for paying rent and an increase to the Earned Income Tax Credit.
“We were reforming the estate tax to exempt estates up to $2 million, because a lot of people now are land-rich but cash-poor,” said Cyr. All told, there was $501 million in tax relief for middle-income earners and $500 million in direct payments, all of which were scrapped as a result of 62F.
Some of those provisions will come back, Cyr predicted. After all, there is still more ARPA money to spend, and that money was not affected by the revenue cap formula of the 1986 law.
The direct payments to middle-income households probably won’t reappear, Cyr said.
“I think there should be reforms to 62F, and I think there should be a cap on the rebates of $2,000 or $3,000,” Cyr said. He also said the legislature could have amended Chapter 62F with veto-proof majorities if the Baker administration had alerted the legislature in April, when it was scheduling technical changes to the law.
“It’s deeply regressive,” said Cyr. “You pick the topic — we’re not going to be able to do that, because of this. It’s about handicapping the next administration. It’s really screwed up.”