MA Tax on Indemnity Just Wrong

The desperation of some lawmakers when it comes to resolving budget issues is impressive, if not downright scary to the average person, or in the case of Massachusetts, the average injured worker.

Massachusetts Gov. Deval Patrick is pitching a plan that would apply the state's personal income tax to all indemnity payments made as part of workers' compensation awards beginning on July 1, 2014.

Work comp indemnity in Massachusetts works the same as in most other systems - benefits for temporary total incapacity are paid at two-thirds of a worker's pre-injury wage to 60%. Lawmakers also capped benefits at 100% of the state average weekly wage.

These standards were established in 1991 and, according to the Massachusetts Workers' Compensation Advisory Council, were based on the assumption that benefits would remain untaxed.

And that makes sense - the purpose of the indemnity is to provide some living money while recovering from injury - and generally factored into that equation is that no taxes would be deducted in that the maximun "earnings" are capped and there is, theoretically at least, no ability to generate income while disabled.

The Massachusetts Taxpayers Foundation estimated that eliminating the exemption for workers' compensation awards would produce $8 million annually under the current tax rates.

Patrick's budget estimates revenues from taxing workers' compensation awards at $6.7 million for fiscal 2013-2014.

What isn't accounted for is the additional frictional expense of collecting those taxes - a task that likely would fall on the state's insurance companies and plan administrators. Collectively, I am willing to bet that implementation and ongoing collection of $8 million in taxes from work comp indemnity payments matches or exceeds what gets collected.

And that expense will get passed down to policyholders, which means the state's employers end up with double taxation, except with additional layers of expense thrown in for good measure.

Massachusetts isn't a big state and it doesn't have a lot of industrial accidents.

The state Department of Industrial Accidents reported workers filed a total of 13,449 new claims in fiscal year 2011-2012.

Alex Zaroulis, director of communications for the Massachusetts Executive Office of Administration and Finance, said Wednesday that Patrick sought repeal of the exemption as part of a broader effort to raise $1.1 billion by eliminating tax breaks.

"The thinking was that eliminating the exemption for workers' compensation benefits as part of a bigger package of changes would be a fair approach, Zaroulis said Wednesday.

That thinking is wrong. Taxing the income benefits of injured workers who are already receiving at least one-third less money than they would otherwise be making if able bodied is decidedly unfair.

And $8 million isn't going to make much of a dent in the elimination of "tax breaks."

John Regan, advisory council chairman and vice president of government affairs for Associated Industries of Massachusetts, said, "My strong sense is that the House and the Senate won't go along with it. Unless something extraordinary happens, my sense is this is no longer on the table."

It shouldn't be on the table in the first place.