In 2018, Massachusetts voters will consider a change to the state’s constitution that would create a new 4 percent surtax on all incomes over $1 million. Supporters, who call the proposed tax the “Fair Share Amendment,” argue it would generate an additional $1.9 billion each year to be used for public education and transportation. Critics argue it binds the state’s hands, making future tax changes difficult. Critics also allege the tax is legally questionable and would give Massachusetts one of the highest income tax rates nationally, making the state less competitive.
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.
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.
Joseph Henchman of the Tax Foundation says Massachusetts should avoid 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.
Should the amendment be approved, the state’s legislature would not be able to adjust the provision due to Massachusetts’ constitutional requirements. The earliest the tax could be modified would be 2023.
Kari Jahnsen of the Tax Foundation argues the proposed increase may violate other parts of the Massachusetts Constitution. “The Massachusetts constitution prohibits ballot initiatives from appropriating funding,” Jahnsen said.
Jahnsen also says the proposed surcharge does not provide any provisions for pass-through businesses – businesses where owners or shareholders report their income on their personal tax filings rather than a separate corporate filing. According to the IRS, 10,000 filers in Massachusetts listed income above $1 million from partnerships or S corporations, which represented 63 percent of net pass-through income.
The new top rate would give Massachusetts’ pass-through businesses the fifth highest tax rate in the nation, making the state less desirable for small businesses and new startups. Jahnsen warns that 97.8 percent of all employers in Massachusetts are small businesses and that these businesses employ half the state’s total workforce.
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.
While some supporters of the amendment argue large-scale relocation by wealthy taxpayers is not likely to occur, 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.
Instead of increasing taxes on higher earners, Massachusetts lawmakers should focus on making the state a more attractive place for businesses and workers, not worse.
The documents cited below examine millionaire taxes and their history of failing to shore up state budgets and failing to increase revenue.
Millionaire’s Tax Would Revive ‘Taxachusetts’
Kari Jahnsen of the Tax Foundation examines the proposed millionaire tax in Massachusetts and argues it could have strong negative effects on the state’s economy. “As the Massachusetts legislature considers the so-called ‘Fair Share Amendment’ tomorrow, policymakers would be wise to heed the possible economic consequences of supporting such a large, concentrated tax increase,” wrote Jahnsen.
Ten Principles of 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?
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
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Massachusetts Considers a 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”
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?
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
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?
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.
Seven Myths About Taxing the 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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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 John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.