What the Proposed Change to the State’s Tax Cap Means for Residents and the State
Question 5 on this year’s ballot proposes a change to the state’s cap on allowable tax collections, the so-called 62F law. MTF has published an in-depth analysis of this question and publicly opposed its passage. This brief answers basic questions on what the ballot initiative does and how its passage would affect residents and the state budget.
What is the state’s current tax cap law?
Chapter 62F of the state’s General Laws was enacted by voter referendum in 1986. It establishes an upper limit on the amount of tax collections the state can take in during a fiscal year. Any amounts collected over that limit are returned to taxpayers as rebates.
The original tax cap was established as tax collections in fiscal year 1986 (FY 1986). Since then, each year’s tax cap is the prior year’s cap, adjusted by the three-year average of wage and salary growth. The tax cap is certified by the state auditor in September, following the conclusion of the fiscal year in June.
In 2023, lawmakers excluded tax revenue generated by the state’s four percent surtax on income over $1 million from the tax cap calculation.
What does Question 5 do?
Question 5 makes two changes to the state’s existing 62F tax cap law:
- It defines each year’s tax cap as tax collections in the prior year adjusted by the three-year average of wage and salary growth; and
- It includes surtax collections within the calculation.
What is the intent of the Question 5 changes?
Both changes are intended to increase the likelihood that the state exceeds the tax cap, increasing the frequency of refunds to taxpayers. Proponents also argue that reducing the cap will lower state budget spending.
Do these changes make triggering the cap more likely?
Yes, anchoring each year’s cap to prior-year tax collections, as opposed to the prior-year cap, would make triggering the cap much more likely. Currently, the cap is tied back to FY 1986 collections and automatically adjusted for wage and salary growth. Because wage and salary growth has consistently exceeded growth in tax collections over the past 40 years, in most years there is a significant gap between allowable taxes and actual collections.
The proposed change eliminates the ability of a gap to form between the tax cap and actual collections by anchoring each year’s cap to actual collections. This means that in any year in which growth in tax collections exceeds wage and salary growth over the prior three years, the cap would be hit.
As explained in MTF’s earlier analysis, the inclusion of the surtax within the calculation would have a relatively minor impact on the likelihood of hitting the cap in conjunction with the other proposed change.
How often do tax cap refunds currently occur? How would that change with Question 5?
Tax cap refunds have been rare – refunds were awarded after FY 1987 and FY 2022. In FY 2026, the most recently concluded fiscal year, the tax cap was calculated as $48.3 billion, while actual collections were $43.1 billion, a gap of $5.2 billion.
Question 5 would increase the frequency of tax cap refunds. Our modeling indicates that the refunds would occur about 3 or 4 times every ten years, with an average refund of $701. Refunds would rarely occur in back-to-back years, because the refund related to collections in one fiscal year is debited against tax collections in the year the refund occurs, depressing total collections in the following year.
Would Question 5 provide a meaningful spending constraint in annual budget development?
No. The annual budget development process occurs between January and June, while the Chapter 62F certification process occurs in September, meaning that budget writers would not have any relevant information to use in the development process. Further, tax estimates used to build the budget have been consistently conservative over the last seven years – falling well below actual collections and proposed spending.
The tax cap change would reduce deposits into the Rainy Day Fund, which is used in times of fiscal emergency. The primary source of deposits into the state’s Rainy Day Fund is end-of-year budget surpluses. MTF’s modeling estimates that Question 5 would have reduced the state’s Rainy Day Fund balance by more than $4 billion between FY 2016 and FY 2025.
Why is MTF opposed to Question 5?
MTF is opposed to the proposed changes to the tax cap law because it is poorly designed. It will not provide a meaningful constraint on annual budget spending and it will not provide consistent tax savings for residents.
Most problematically, the proposal will have unintended and hugely problematic consequences during times of recession. During a recession, tax collections fall for an extended period before ultimately rebounding. If Question 5 were in place, it would not be possible for state revenues to rebound after a recession because collections in one year will be limited by prior year collections, which by definition are far below pre-recession levels.
A quick example from the Great Recession:
- In FY 2009, tax collections fell by 12 percent and remained essentially flat in FY 2010.
- In FY 2011, collections rebounded, growing by 11 percent, but still fell short of pre-recession levels.
- If Question 5 were in place during the Great Recession, FY 2011 tax collections would only have been allowed to grow by 0.4 percent ($75 million), $1.9 billion less than actual collections and $2.1 billion less than pre-recession levels.
The poor design of Question 5 would make it much tougher for the state budget to recover from recessions, especially given the proposal’s impact on Rainy Day Fund deposits. The question would mean more cuts and more proposals to generate revenue not subject to the cap during times when the state and its residents can least afford it.