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Upcoming tax credits will disproportionately benefit high-income residents, experts say

High-income taxpayers could receive credits of more than $20,000 while a new estimate suggests low-income residents could see credits of just $9.

Piles of tax returns in a Department of Revenue facility in Chelsea. Kayana Szymczak / Boston Globe

Nearly $3 billion in excess tax revenue is set to be returned to Massachusetts residents this fall, but there’s a catch. Under a formula laid out in a 1980s tax cap law that has only been triggered once before, the amount of money residents receive could vary dramatically, perhaps by as much as $20,000. Now, experts are voicing concern that the payout would disproportionately favor the state’s wealthiest residents.

In general, eligible taxpayers are expected to receive a credit amounting to approximately 13% of their Massachusetts personal income tax liability for Tax Year 2021. The state created an online tool for residents to calculate how much they can expect to receive. 

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The distribution of these rebates was triggered by historically-high levels of tax revenue collected by the state last fiscal year. Over the summer, officials announced a nearly $5 billion surplus, bolstered by the collection of nearly 21% more in tax revenue than the previous year. 

This revenue exceeded the tax cap as laid out in a law known officially as Chapter 62F, leading State Auditor Suzanne M. Bump to determine in mid-September that this $2.9 Billion must be returned to taxpayers. 

The question of how this money will be returned is causing concern. The tax cap law sets an artificial limit on how much tax revenue the state can collect, without taking into account the current needs of the state, according to a recent analysis from the Massachusetts Budget and Policy Center. The law “in effect transfers to higher income households tax revenue paid by lower income households,” Senior Policy Analyst Jason Wright said in the report, titled “62F Credits Benefit the Rich.”

This declaration is based on the fact that 62F gives tax credits back to residents according to how much income tax they paid the year before. 

But, according to Wright, non-income taxes like sales and gas taxes make up a higher share of the overall taxes paid by lower income residents. If a low-income family paid sales and gas taxes, but did not earn enough to avoid a “no-tax status,” they would not receive a 62F credit. Low-income residents might also not receive a 62F credit if other low-income credits reduced the amount of income tax they owed to $0, according to Wright. 

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Through an analysis of data from the Department of Revenue, Wright determined that the 62F credits would disproportionately benefit higher income households. 

His breakdown shows that households in the bottom 20% of earners would receive a credit of just $9 under 62F. Households falling into the top 0.57% of the state’s income distribution, those earning more than $1 million per year, would receive 62F credits of more than $22,000, according to the analysis. 

“We are giving millionaires the equivalent of a Rolex or more than a semester at UMass!” Wright said in the post.  

Almost three quarters of the total credits that would be distributed would go to households in the top 20% of Massachusetts’ income distribution, but less than 1% of the total credits would go to the bottom 20% of earners, Wright said. The average 62F credit would be $529, according to the report. Wright used data from 2018, the most recent available. 

For residents to be eligible for these credits, they must have filed a 2021 state tax return on or before Oct. 17, 2022. Those that are eligible will receive their payments automatically, either as a check sent through the mail or in a direct deposit. 

Taxpayers can calculate their credit by multiplying their previous year’s income tax liability by a certain excess revenue percentage determined by Bump’s office. State officials expect this to be 13%, but the percentage will be finalized in late October, after the tax return filing deadline.

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The refunds are expected to be sent beginning in November, according to the Baker administration.

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