Millionaire tax ballot measure may revive old reputation
By Evan Lips | December 9, 2015, 6:18 EST
BOSTON – If a coalition of labor unions and liberal activists have their way, Massachusetts soon may regain its old nickname: Taxachusetts.
Last week, sponsors of a proposed ballot question that seeks to impose a surtax on the Bay State’s highest income earners submitted more than the required 64,750 certified voter signatures to Massachusetts Secretary of State Bill Galvin. Once verified, Galvin will pass the proposal on to the clerk of the House of Representatives for further action. Ultimately, if it clears all hurdles, the initiative it could become law in the final months of 2018, affecting 2019 incomes.
Dubbed the “millionaire’s tax” by supporters, the proposed constitutional amendment would add an additional 4 percent levy on income of more than $1 million. If successful, the initiative would create first graduated income tax for Massachusetts filers.
Currently, an estimated 19,500 filers report annual taxable income of more than $1 million. Massachusetts is one of eight states with a flat or universal tax rate on income, currently set at 5.15 percent. The rate may fall to 5.1 percent at the start of next year, if certain benchmarks are met by Dec. 15, according to the State House News Service.
Proponents of the proposal point to a nearly $2 billion surge in annual tax receipts projected by the state Revenue Department, should the initiative become law. Advocates also cite another set of numbers as evidence of the measure’s popularity: more than 157,000 voters signed the petitions to get it on the ballot, more than twice the required number.
“This is something the people support,” said Harris L. Gruman, vice chairman of Raise Up Massachusetts, the organization that spearheaded the petition drive.
But business leaders and advocates of fiscal responsibility are speaking out against the proposal, which they say may drive innovators out of Massachusetts and revive its legacy as a high-tax state.
“Taxing millionaires is like skipping over a dollar to pick up a dime,” said Paul Craney, president of Massachusetts Fiscal Alliance, a budget watchdog group.
“If you tax millionaires like that, not only are they going to leave the state, but a lot of times they’re going to take their businesses with them.”
For some company owners, a 4 percent surcharge on top earners could drive them to relocate to more tax-friendly states, said Christopher Geehern, executive vice president of the Associated Industries of Massachusetts.
“There are a number of small businesses that pay taxes at the individual rate,” Geehern said. “Our concern is that the tax would disproportionately affect those companies and suck a whole bunch of capital out of the productive sector of the economy.”
For his part, Gruman, who is leading the petition drive, said that if income-tax rates really mattered to high earners, millionaires would have “left long ago” for a low-tax state such as New Hampshire.
“Right next door to us, New Hampshire has no income tax,” Gruman noted. “If I were a millionaire, I’d already be living there. That temptation has been there for a long, long time.”
Although wage earnings aren’t subject to tax in the Granite State, it does impose a levy on dividend and interest income. Even so, that is minimal compared with Massachusetts taxes, which in the 1970s were among the highest in the nation. In 1977, combined state and local taxes claimed almost 14 percent of personal income, behind only New York and Alaska, giving rise to the derisive “Taxachusetts” nickname. It has since fallen closer to the middle compared with other states.
Maryland provides what may be a more meaningful example, according to Craney.
“A few years ago they imposed a similar tax,” Craney said, referring to a temporary increase on taxpayers earning more than $1 million. “Within just two years, a swath of millionaires left the state.”
The effects of the Free State’s tax hike have been well-documented, and helped propel Gov. Larry Hogan, a Republican, into office in 2014. The higher rate came under then-Gov. Martin O’Malley, a Democrat, when in 2008, lawmakers imposed a 6.25 percent top rate on those reporting income of more than $1 million, up from 4.75 percent. While described as a temporary measure, the top rate fell to 5.5 percent in 2011 and then rose to 5.75 percent the next year, where it remains today.
The tax hike was intended to address a projected budget gap of as much as $1.7 billion. Hogan started Change Maryland, an anti-tax advocacy organization, in 2011. The group estimated the tax hike actually cost Maryland $1.7 billion in tax revenue.
A study of tax migration from the Internal Revenue Service in October appears to support the basic analysis produced by Hogan’s group. According to one analysis, the IRS report shows about 5,600 fewer taxpayers in Maryland and a net loss of adjusted gross income totaling about $1.63 billion.
Consistent with these findings, a 2013 report from the Maryland Public Policy Institute says that “brokers, tax consultants and real estate agents report a throng of their clients moving out of Maryland to save money on taxes and leave more to their children.”
But a May 2009 Wall Street Journal editorial, published a little more than a year after the 2008 tax hike, notes a one-third drop in the number of millionaire tax filers, to 2,000 from 3,000, but attributes much of the drop to the recession. Even so, it pointed out that after the tax hike, millionaires in the state paid $100 million less in taxes than the year before – far from the projected $106 million gain.
Observing that no one disputed some high-income earners did leave after the tax hike, the Journal also quoted Christopher Summers, the Public Policy Institute president, who said wealthy residents “typically own second homes in tax-friendlier states like Florida, Delaware, South Carolina and Virginia. So it’s easy for them to change their residency.”
Yet according to tax advocate Gruman, the richer people are, “the more inclined they are to stay” in high-cost states like Massachusetts and Maryland. In other words, a rate hike won’t make much difference. Similar thinking preceded Maryland’s increase, according to the Journal.
In Massachusetts, voters have repeatedly rejected ballot initiatives that would have imposed a graduated income tax rate. The last time they voted on such a question, in 1994, they rejected 2-to-1.
As written, the millionaire tax initiative stipulates that the additional revenue generated will be used to fund transportation and education spending.
But Massachusetts law also stipulates that gasoline tax revenue be used to fund transportation-related projects, and yet the state has routinely moved some of the proceeds to the general fund.
Citizens for Limited Taxation, an advocacy group that opposes the ballot initiative, says its supporters mislead voters in saying that the added revenue would only be spent on transportation and education and points out that initiative petitions can’t appropriate revenue under the state constitution, noting the initiative itself says revenue allocations are “subject to appropriation by the state Legislature.”
Critics also say the proposal attempts to circumvent the Legislature, which rejected a similar hike proposed by former Gov. Deval Patrick, a Democrat in 2013. Patrick said the increase would generate an additional $1.9 billion per year. Like Raise Up Massachusetts, he said the revenue would be dedicated to transportation and education.
That aspect of the initiative suggests to critics that the proposal draws much of its backing from labor unions. Teacher unions are the state’s biggest labor organizations, and Gruman himself works for another, the Service Employees International Union.
“This is nothing more than unions trying to impose their will,” said Craney of the Massachusetts Fiscal Alliance. “They couldn’t get it done through the state Legislature so now they’re trying to take advantage of the voters.”
Before the proposal to amend the state constitution can go before voters, a combination of 50 votes culled from the 160-seat House and 40-seat Senate during two separate legislative sessions are needed. That Senate President Stan Rosenberg (D-Amherst) has said he supports the measure may help it gain that level of legislative backing. If it does, voters may have the final say in November 2018.