Massachusetts legislators recently voted to advance a change in the state’s constitution that would create a new 4 percent surtax on all incomes over $1 million. These tax dollars would be strictly allocated for public education and transportation. The vote is only the first step in the amending process; the changes must be approved during the 2017–2018 legislative session and then be approved by voters in a statewide ballot in 2018.
The new tax would reverse the state’s recent trend to move away from the high taxes that spawned the state’s regrettable nickname: “Taxachusetts.” In 2002 the state passed a tax reform plan that gradually decreased the state income tax rate in accordance with a set of tax triggers. Forbes recently ranked Massachusetts tax policies as the 39th best in the United States.
The proposed change would add a paragraph to the state’s constitution overriding the current language that requires the state income tax to be set at uniform rate and prohibiting progressive or graduated tax rates. The new surtax would increase the rate from the current 5.1 percent to 9.1 percent for income over $1 million and would be adjusted to match inflation. According to the state’s Department of Revenue, around 20,000 households in the state would be affected by the new tax, raising around $1.9 billion annually.
Millionaire taxes are an unreliable source of revenue. Scott Hodge of the Tax Foundation notes millionaire status is both temporary and fluid. Many taxpayers achieve millionaire status only once in their lifetime. In addition, the number of millionaires fluctuates based on the business cycle. Before the recent recession, between 2002 and 2007, the number of millionaire tax returns more than doubled to a record 392,220; as a result of the recession, the number fell by 40 percent between 2007 and 2009.
A millionaire tax is likely to discourage both new capital and wealthy taxpayers from entering the state. Higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. The revenue-generating results of millionaire taxes have been mixed—many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire. Relying on a fluctuating tax with a small base like the millionaire tax can lead to larger budget deficits than with broader and flatter tax systems.
Massachusetts need only look to Maryland to know what the new tax’s effect will be. In 2009 Maryland created a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year the number of people in the state reporting incomes of $1 million or more fell by one-third. Maryland took in $100 million less from millionaire earners than the previous year, and the state allowed the tax to expire in 2010.
Joseph Henchman of the Tax Foundation also warns Massachusetts against implementing tax reform through constitutional changes. “A major reason why tax rates are in statutes rather than in constitutions is that constitutions are less flexible to alter in changing situations. If Massachusetts became flush with revenue or if the tax increase turned out to be an awful mistake, it would take another constitutional amendment to change it,” wrote Henchman.
Instead of increasing taxes on higher earners, Massachusetts lawmakers should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.
The documents cited below examine millionaire taxes and their history of failing to shore up state budgets and failing to increase revenue.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Massachusetts May Set Its Income Tax Rate in the Constitution. How Unusual Is That?
http://taxfoundation.org/blog/massachusetts-may-set-its-income-tax-rate-constitution-how-unusual
Joseph Henchman examines the proposed changes to Massachusetts’ constitution, which, if passed, would create a millionaire tax. Henchman argues using a state’s constitution to change tax policy makes any future changes unnecessarily difficult.
Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
The Number of Millionaire Tax Returns Fluctuates Every Year; Millionaire Status is Fleeting
http://taxfoundation.org/blog/number-millionaire-tax-returns-fluctuates-every-year
http://taxfoundation.org/blog/millionaire-status-fleeting
Scott Hodge of the Tax Foundation presents two charts that show millionaire status is both temporary and fluid, many taxpayers only achieve the status once in their life, and the number of millionaires fluctuates based on the business cycle. All this makes millionaire taxes an unreliable source of revenue.
Massachusetts Considers a Millionaire Tax
http://taxfoundation.org/blog/massachusetts-considers-millionaire-tax
Nicole Kaeding of the Tax Foundation writes about Massachusetts’ proposed millionaire tax, how the process of creating the tax will continue, and the possible effects the tax may have on taxpayers.
Trend #1: “Millionaires’ Taxes”
http://taxfoundation.org/article/trend-1-millionaires-taxes
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.
Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.