A Proposed Draconian Tax on Workers’ Comp Benefits: Trying to Avert a Crisis in Massachusetts

It has long been the case that workers’ comp benefits are virtually universally exempt from state or federal taxation, the reason being that an injured worker does not stand to profit for losing some aspect of their health or being disabled; therefore, the injured worker should not be taxed for receiving workers’ comp benefits.

As reported by the Boston Globe on January 19, 2013, Governor Deval Patrick’s proposed 2014 budget contains a long list of proposed state tax changes. Among these is a line item to remove the exemption for workers’ compensation benefits, which would generate an estimated $8M annually in state revenue at the current tax rate of 5.25% and an estimated $10M annually at a 6.25% tax rate.

Among those who noticed this line item was Alan S. Pierce, a former President of the Massachusetts Academy of Trial Attorneys (MATA) and a member of the Larson’s National Workers’ Compensation Advisory Board. He notified his son, Judson Pierce, the co-chair of MATA’s Workers’ Comp Section, who then quickly contacted the leadership at both MATA and the Massachusetts Bar Association (MBA). Douglas K. Sheff, the President-elect of the MBA, worked tirelessly with both sides of the bar to present a united front to the legislature about the need to remove this line item from the proposed 2014 budget.

According to a LegalTalk Network interview with Douglas K. Sheff of the MBA, “It is a radical step and it’s an unfair one to tax a workers’ comp recovery”.

Sheff explained that in Massachusetts, the rate at which workers’ compensation recipients are compensated was reduced from 66 2/3 percent to 60 percent back in 1992, the rationale being that it was a tax-free recovery.

But clearly the Patrick administration didn’t recall this promise made in 1992. Sheff called it a “bait and switch” tactic, alleging that the promise made in 1992 was now being broken.

Sheff further pointed out that the 6 percent difference “makes all the difference in the world” to injured workers who are “hanging on by a thread as it is”. Sheff warned that if these injured workers can’t keep their heads above water, they can’t contribute to the economy and most likely will end up on public assistance.

According to Sheff, there really isn’t any group who would support this radical tax move. In particular, insurance companies would be against it because the onus of collecting the tax would probably fall on them. Moreover, the Department of Industrial Accidents does not require the social security number of an injured worker seeking workers’ comp benefits, so that policy would hinder attempts to collect the tax and could lead to a backlog of cases. As Sheff pointed out, if cases don’t settle, then the backlog of cases “will cost taxpayers more than the tax will yield” because employers would end up keeping people on workers’ comp longer.

Working together, the MBA and MATA set out to educate the leadership of the House and Senate about the unfairness and pitfalls of the proposed state tax on workers’ comp benefits. In response, the House version of the 2014 Budget has removed the workers’ comp tax provision.

Alan S. Pierce praised the leadership of the MBA and MATA for taking swift action on this matter as it places an unfair burden on injured workers and their families. Pierce cautions that the budget is not yet a done deal, but he and others remain optimistic that this concept of taxing workers’ comp benefits will not survive in the final version of the budget.

© Copyright 2013 LexisNexis. All rights reserved.