Proposition 80, an amendment to the Massachusetts Constitution that would create a new 4 percent surtax on all incomes greater than $1 million, will be considered by voters in a 2018 referendum. Supporters call the proposed tax the “Fair Share Amendment” and estimate it would generate an additional $1.9 billion each year to be used for public education and transportation. Critics argue it would make future tax changes difficult, that it’s legally dubious, and that it would make Massachusetts’ income tax rates among the highest in the nation.
In 2002, Massachusetts passed a tax reform plan that gradually decreased the state’s income tax rate in accordance with a set of tax triggers. If passed, Proposition 80 would override the state’s constitutional requirement that the state income tax be set at a uniform rate—allowing progressive or graduated tax rates. The new surtax would increase the rate from 5.1 percent to 9.1 percent for income over $1 million, and it would be adjusted to match inflation. Around 20,000 households in the state would be affected by the new tax, according to the Massachusetts Department of Revenue.
Under the current tax system, Massachusetts households with incomes greater than $1 million, 0.05 percent of the state’s taxpayers, pay more than 29 percent of the state’s income tax, The Boston Globe reports.
The effects of this progressive system are magnified because of Massachusetts’ complex tax code. When tax credits and deductions are included, taxpayers in the lowest income quintile pay an income tax rate of only 0.8 percent, five times less than the rate paid by the highest quintile, notes The Boston Globe’s Jeff Jacoby.
Massachusetts should avoid implementing tax reform through constitutional changes, says Joseph Bishop-Henchman, executive vice president of the Tax Foundation. “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.
Kari Jahnsen, writer for the Tax Foundation‘s Center for State Tax Policy, argues the proposed increase may violate other parts of the Massachusetts Constitution. Jahnsen points out that the Massachusetts Constitution prohibits ballot initiatives from appropriating funding. Since Prop 80 designates the new tax revenue for transportation and education, its constitutionality is uncertain.
The new top rate would also enact the fifth-highest tax rate in the nation on pass-through businesses—making the state less desirable for small businesses and 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 produce several negative economic effects in the Bay 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 at best; 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 large budget deficits. In many cases, states with broader and flatter tax systems generate more revenue in a consistent and predictable manner.
A recent report from the Pioneer Institute found Massachusetts’ current tax system is already losing taxpayers to states with lower taxes. The Pioneer report determined Massachusetts experienced a net outflow of $15.9 billion of adjusted gross income of the primary taxpayer between 1992–93 and 2014–15. The mass exodus from Massachusetts most benefited no-income-tax Florida, where 47 percent of those who departed the Bay State relocated, and New Hampshire, where 27 percent migrated.
Proposition 80 would create an unnecessary burden on Massachusetts taxpayers that would harm economic growth. Instead of increasing taxes on higher earners, Massachusetts lawmakers should focus on making the state a more attractive place for businesses and workers, thus spurring economic development and more state revenue over the long term.
The documents cited below examine millionaire taxes and their history of failing to shore up state budgets and failing to increase revenue.
Will The Wealthy Leave? They Already Are and Proposition 80 Will Only Make It Worse
https://pioneerinstitute.org/economic_opportunity/proposition-80-will-increase-migration-high-earners-businesses/
In this paper, Pioneer Institute Research Director Greg Sullivan draws on IRS data showing aggregate migration flows by amount of adjusted gross income and age of the primary taxpayer. The data show a strong correlation between state tax levels and migration patterns.
Housing & Who’s a ‘Millionaire’ According to Proposition 80
https://pioneerinstitute.org/economic_opportunity/inadequate-inflation-adjustment-subject-increasing-numbers-millionaires-tax/
In this paper, Pioneer Institute Research Director Greg Sullivan examines the proposed millionaire tax hike and argues it will likely ensnare an ever-increasing number of taxpayers because the index used to adjust the million-dollar threshold has historically grown at a far slower rate than both the taxable income of Massachusetts taxpayers and increases in state home values.
Millionaire’s Tax Would Revive ‘Taxachusetts’
https://taxfoundation.org/millionaires-tax-massachusetts/
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.
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.
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.
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 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 Charlie Katebi, a Heartland Institute 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.
