The Department of Revenue: Tax Collector As Benefits Administrator? How Refundable Tax Credits Impact the Role of the State Revenue Agency

By Luz A. Arevalo and Angela Divaris

While revenue collection, as the primary goal of any tax system, would seemingly present a straightforward task, the notorious complexity of U.S. federal and state tax codes stems in part from the tax system’s efforts to achieve social and economic policy goals through targeted refund and credit programs. But this complexity often results in a compliance burden that falls disproportionately on the low-income taxpayers that the credits aim to help, and this of course limits their impact. Progressive, refundable tax credits aimed at evening the playing field for lower income households by addressing other regressive taxes can only achieve their objectives if they are accessible and equitably administered. Recent improvements to our state refundable tax credits present opportunities and challenges facing the Department of Revenue (“DOR”) in the administration of these social benefits. Practitioners can benefit from an awareness of the structure of the system and the benefits available.

Recent Reforms in Massachusetts

The Massachusetts Legislature has made significant changes to our tax laws in the last five years which advance progressivity. The historic “Fair Share Amendment,” colloquially referred to as the “Millionaire’s Tax” makes our state code less regressive by leaving behind our prior flat rate tax, and aims to invest the projected billions of dollars of additional revenue in education and transportation priorities. The 2023 state tax relief package, the first such tax reform in 20 years, included increases to the Earned Income Tax Credit (“EITC”) and the Senior Circuit Breaker, plus the creation of a universal Child and Family Tax Credit (“CFTC”). While additional touted tax cuts also benefited high earning households, these reforms had the overall effect of Massachusetts’ ranking jumping significantly in progressivity measures among the states. And tax credits have been instrumental in these changes.

Tax credits are either refundable or non-refundable: a non-refundable credit is limited to the taxpayer’s liability, whereas a refundable credit, if greater than the tax owed, will generate a refund for the recipient. Refundability is the key to maximizing the antipoverty effects of a tax credit because it allows low-income taxpayers to benefit from the surplus tax credit amount. Federal refundable tax credits are the second most important antipoverty program after Social Security, and perhaps the most effective antipoverty tool for working families. States are increasingly using their tax codes to combat poverty, informed by the lessons from the historic yet temporary tax credit expansions in 2021.

Earned Income Tax Credit

The federal EITC was established 50 years ago to offset the adverse effects of Social Security and Medicare payroll taxes on working poor families while incentivizing employment. It is calculated as a percentage of each dollar earned from wages or self-employment that varies depending on the number of up-to-three claimed qualifying children. Massachusetts enacted its own EITC in 1997 based on federal criteria, and in 2023 increased the credit to 40% of the federal amount (current federal EITC ranges from $632 to $7,830).

The EITC has enjoyed bipartisan support through its history in part because it is a “pro-work” program. It is effectively targeted to low-income workers. Thanks to its longevity, the EITC has been the subject of multiple academic studies documenting its myriad long-term positive effects extending beyond the recipient to the larger community: increases in labor force participation, particularly among single mothers; improved infant and maternal health, increased educational achievement, and even higher earnings in the next generation leading to higher retirement income from Social Security. Even though the EITC is the most important tax credit for needy families—lifting millions of children out of poverty every year—the IRS estimates that approximately 20 percent of otherwise eligible households fail to claim it year after year. The IRS engages in annual outreach around the EITC, but studies show that awareness campaigns are not sufficient to increase uptake in the face of structural barriers such as the lack of access to services.

Child and Family Tax Credit

Joining a trend among the states to institute their own child tax credits, Massachusetts created a CFTC in 2021. The original state credit combined two previously existing tax deductions reducing taxable income and created a modest refundable credit of $180 for up to two eligible children or qualifying relatives; the credit was increased to $440 for tax year 2024 and the cap for eligible dependents was removed, allowing larger families to benefit. It includes children under 13 years of age, disabled children of any age, disabled spouses, and dependents over age 65. Because eligibility is not based on earned income, it is accessible to the poorest families, and because there is no income cap, high earners also benefit.

While the state EITC follows federal eligibility rules and is simply a percentage of the federal credit, the eligibility criteria for the Massachusetts CFTC differs from the federal Child Tax Credit (“CTC”) which leaves out many needy families. To access the federal CTC, a family must earn at least $2,500 and will not receive the full benefit unless its earnings exceed $25,000. By contrast, the Massachusetts credit includes all families, even those without earnings from work. Families without enough income do not owe any taxes and do not benefit from deductions, exemptions or non-refundable credits. The state credit gives the lowest-income families with no taxable income the full value of the benefit, perhaps in recognition that the wage-less work of caring for dependents is nonetheless work deserving of recognition in our tax code. There is significant potential for this credit to better address poverty in the state if it is expanded in amount and age eligibility (e.g., including teenagers) in the future.

The Senior Circuit Breaker

Massachusetts and twenty-nine other states have a version of a “circuit breaker” tax credit whose purpose is to offset the cost of property taxes for seniors with very low or zero taxable income. The recent tax package doubled the Massachusetts Senior Circuit Breaker Credit, making it worth up to $2,590. The credit is available not only to homeowners, but also to renters, on the theory that a portion of rent indirectly pays property taxes and landlords pass on relevant tax increases to tenants. Circuit breakers make state tax codes more equitable and less regressive by targeting the credit’s benefit to a taxpayer’s ability to pay. Participation in such programs is often low due to complexity and lack of awareness.

The DOR as Benefits Administrator

Using the tax system to combat poverty yields surprising results. A 2015 study reported that families receiving benefits as result of filing a tax return did not experience the same stigma associated with the traditional welfare agencies. Their dignity and sense of civic participation were instead enhanced.

Tax credits, both federal and state, are critical elements of the safety net. To best fulfill its dual role, the state agency’s customer service, one of the few with actual humans taking calls, must be optimized to ensure that the benefits reach those who need them the most. This involves streamlining processes, enhancing accessibility, and providing clear, empathetic communication to non-traditional taxpayers. There are several key measures the DOR could implement toward those goals:

• Undertake data analysis to determine the level of participation in tax credits by residents. For example, the DOR could compare the number of taxpayers claiming the CFTC with the number of children enrolled in MassHealth in a given zip code, to help estimate expected participation rates.
• Review the rate of response to verification letters. Low-income taxpayers often have unstable housing, or unreliable mail, and therefore the lack of a response can result from the fact that they did not receive the correspondence.
• Support the work of the Taxpayer Advocate Office as the eyes and ears of taxpayers. The Advocate informs the Commissioner about systemic issues and may recommend legislative improvements. Its interaction with Volunteer Income Tax Assistance (“VITA”) and the Low Income Taxpayer Clinics can identify gaps in service, and assist with robust outreach efforts.
• Clarify the dual mission. The Massachusetts DOR should follow the recommendation of the federal Taxpayer Advocate and explicitly include mention of its role as a social benefits administrator, which would clarify the role of the agency to employees.
• Re-affirm the confidentiality of information provided by taxpayers to the DOR. In light of fears, especially among immigrant communities, confidence in data security will be crucial to encourage participation.
• Review ways to enhance collection services. The DOR Offer in Final Settlement can be a win-win by resolving debts and generating revenue; yet the program remains disfavored and underutilized. Pending legislation (An Act Providing for Settlements of Tax Liability, H. 3062, 194th Gen. Ct. (Ma. 2025)/An Act Providing for Settlements of Tax Liability, S. 2027, 194th Gen. Ct. (Ma. 2025)) would update the state program based on federal practice and more effectively bring distressed taxpayers back into compliance.
• Encourage greater oversight of commercial tax preparers. This can be pursued in tandem with the expansion of the VITA program, which has suffered recent losses in both federal and state funding.

Conclusion

Massachusetts has moved away from a regressive tax system where households with lower incomes pay a larger share in taxes than those with higher incomes. A culture adjustment is required within DOR in order to best administer refundable credits to the low- and moderate-income taxpayers who need these cash payments. Having an active Advocate, data on credit uptake, a robust outreach program, and improved services will get the state closer to the ultimate and intended goal of the recent tax reform legislation: to reduce poverty among Massachusetts residents.

Luz A. Arevalo and Angela Divaris are Senior Attorneys at Greater Boston Legal Services, and Co-Directors of the Low Income Taxpayer Clinic (LITC). They represent low and moderate-income taxpayers, before the Internal Revenue Service, the Massachusetts Department of Revenue, Appellate Tax Board, and the U.S. Tax Court. The clinic also advocates to improve the tax system through administrative and legislative changes. They welcome inquiries from practitioners interested in assisting taxpayers, and may be reached at larevalo@gbls.org and adivaris@gbls.org.