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In a surprise, Baker says taxpayers could receive ‘north of $2.5 billion’ in tax relief under little-known law

Governor Charlie Baker said Thursday that he believes the state can absorb both the tax relief package and billions in other tax credits.Nicolaus Czarnecki/Pool

With state coffers overflowing, Massachusetts taxpayers could receive nearly $3 billion in tax relief under an obscure 36-year-old law, Governor Charlie Baker’s administration said Thursday, surprising lawmakers just as separate tax relief talks seemed to be reaching a crescendo.

The likelihood of a decades-old law forcing the state to give back billions to taxpayers quickly shook Beacon Hill on the same day data showed the economy had edged closer to, if not officially in, a recession.

It also complicated legislators’ negotiations over a $1 billion package of tax breaks and rebates — a mammoth proposal lawmakers pursued to help ease the pinch of ballooning inflation but were still scrambling to complete before their legislative session ends Sunday night.

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How much the state could ultimately hand back to taxpayers is unclear. But Baker said Thursday that the state appears poised to trigger a 1986 voter-passed law that seeks to limit state tax revenue growth to the growth of total wages and salaries in the state.

Should revenue exceed that “allowable” amount, taxpayers are then due a credit equal to the excess amount. The state auditor is tasked with determining the final amount from the previous fiscal year each September.

The state has yet to release its final revenue numbers for the fiscal year that ended June 30, though officials said they could come as early as next week. Still, with collections running more than 21 percent above projections through the end of May — prompting one estimate of a $3.6 billion budget surplus — Baker said that his administration believes the excess amount is “probably north of $2.5 billion.”

His budget office later released estimates showing the excess could, as of now, actually near $2.97 billion, meaning more than 3 million taxpayers could get back roughly 7 percent of the income taxes they paid in 2021, administration officials said.

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For example, for someone whose taxable income was $75,000 after deductions and exemptions, that could mean a return of $250, according to Baker’s budget office.

“These are sort of unprecedented increases in tax revenue,” Baker said Thursday after signing the $52.7 billion state budget, “which is, in some ways, exactly what this thing was designated [to do], to ensure that people of Massachusetts participated in that windfall.”

Since the 1986 law was passed by voters, the cap was triggered just once, in fiscal year 1987, when revenues exceeded the allowable amount by $29.2 million, according to a state auditor report. At the time, the state added a line to the 1987 version of the individual income tax return form, where individual taxpayers could “insert his or her individually calculated share,” according to the auditor’s office. The state ultimately issued $16.8 million in credits, leaving nearly $12.4 million unclaimed.

.An obscure 36-year-old law passed by voters means Massachusetts taxpayers could receive nearly $3 billion in tax credits.Handout. Globe Staff

CommonWealth Magazine first reported Wednesday that the cap could be triggered.

Under the law, the credit would be applied to the “current personal income tax liability of all taxpayers on a proportional basis” to the tax liability from the previous tax year.

But Michael Heffernan, Baker’s budget chief, said the law is unclear in exactly how the state should issue those credits, suggesting the timing and form could be flexible. Baker also suggested the money returned to residents could be issued as rebates — a more direct form of payment than a credit, which typically reduces the taxes a person owes.

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“We’re looking at what’s the quickest, most efficient way to get that money back to the taxpayers,” Heffernan said Thursday.

Pushed by Citizens for Limited Taxation and the Massachusetts High Technology Council, the proposal was intended to curtail the Legislature’s habit of “overcommitting resources when tax resources are bountiful,” and then raising taxes to sustain the spending, said Chris Anderson, the council’s current president, who started with the group two years before voters passed the ballot question by a margin of nearly 8 percentage points.

“It’s a fiscally prudent policy that’s timeless,” said Anderson, who pointed to repeated budget surpluses in recent years. “It’s nice to see the seeds that we sowed in 1986 are now coming into play at an appropriate time.”

Baker on Thursday described the development of a potential multibillion-dollar excess as a “fairly recent” one, given it’s hooked on end-of-fiscal-year tax revenue.

Yet, how it could affect ongoing tax relief talks remains to be seen. The House and Senate have each passed, and are trying to reconcile, different versions of a $1 billion tax relief package as part of a hulking economic development bill, including more than $500 million in one-time rebates to potentially millions of taxpayers.

The bills also feature a variety of permanent tax changes that would increase the state’s Earned Income Tax Credit, raise the deduction renters can claim, and reshape the state’s estate tax, among other proposals.

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Despite the 1986 law being in statute for decades, Representative Aaron Michlewitz, the House budget chief, said that when lawmakers crafted the tax packages, they did not know it could be triggered. Senator Michael J. Rodrigues, his Senate counterpart, said Baker’s administration informed lawmakers of it coming into play “literally days ago.”

With the potential of the economy tipping into a recession, Michlewitz said lawmakers have to reevaluate their spending plans quickly. The Legislature’s formal sessions end Sunday night, when lawmakers will also be racing to complete a host of other unfinished bills.

“It definitely, I think, puts everything back on the table for conversation on exactly what we can afford or can’t afford going forward,” said Michlewitz, a North End Democrat.

Baker said he believes the state can absorb both the tax relief package and billions in other tax credits given the flush coffers, the expected multibillion-dollar surplus, and the record-high savings account that, under the budget he signed Thursday, would grow to $8.4 billion, his administration estimates.

“So yeah,” Baker said, “we think it’s affordable.”

Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said the state should have the resources to afford all the various tax relief measures. But he said legislative leaders should consider changing the formula attached to the 1986 law, or even suspending its implementation to avoid money going out in a “not very progressive way.”

Those who pay more in taxes would get more in relief through the excess revenue, as opposed to the lawmakers’ rebate plan, which is targeted toward those making a certain amount.

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Horowitz also acknowledged that changing the law — including just before it’s primed to spit out potentially billions of dollars in relief to taxpayers — may not be politically feasible.

“The timing of this is awkward. It’s also awkward politically,” Horowitz said. “Even if it’s a sensible thing [to argue], ‘This is triggered at a weird time, and we want to make it better,’ going into the election season you open yourself to the charge that you’re standing against tax cuts.”


Matt Stout can be reached at matt.stout@globe.com. Follow him @mattpstout. Samantha J. Gross can be reached at samantha.gross@globe.com. Follow her @samanthajgross.