Blue Mass Group’s David suggested last summer that it’s time to consider, once again, a graduated income tax in Massachusetts. He pointed out that 34 of the other 40 states with income taxes have a graduated system, and suggested that a higher tax rate on the wealthy is a relatively fair way to raise revenue for the state. (Since it could take several years to amend the state Constitution in order to allow a graduated system, David has more recently argued for an increase in the current income tax as a more progressive alternative to a sales tax hike.) 

Today the Pioneer Institute’s Jim Stergios argues that higher tax brackets for the rich is unfair and, worse, counterproductive:

Singling them out will do little else but convince them to change residency, leaving the middle-class has had to pick up the tab. So much for soaking the rich.

Stergios cites a Wall Street Journal editorial on what happened after Maryland boosted its top income tax rate last year:

One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing.

But the Washington Post‘s John Wagner wrote earlier this month that things in Maryland may not be as simple as the Journal suggests:

The data from April’s tax filings, released by the comptroller’s office, came with a couple of big caveats. At least part of the drop-off in Marylanders whose returns showed more than $1 million in taxable income was certainly due to the recession and the decline it has brought in earnings from capital gains and real estate. And the figures do not include taxpayers who filed for extensions.

…

Sen. Richard S. Madaleno Jr. (D-Montgomery), chairman of the county’s Senate delegation, said he thinks it is too soon for people to be moving from Maryland to Virginia, where individual income taxes are lower.

“Trying to sell a high-end house right now is not the easiest thing to do,” Madaleno said. 

So is it prudent to raise the income tax above the current 5.3 percent on the wealthiest individuals in Massachusetts — especially since the wealthiest already pay more than that in 29 states, including California, Minnesota, New York, North Carolina, and Virginia? Would our millionaires really move out en masse?

Perhaps not, but the Journal has another, less ideological beef with a graduated income tax:

…this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions.

That’s the problem with the Bay State’s dependence on income tax revenue, and specifically taxes on capital gains, as MassINC explained in a research report in December. Unless part of the new revenue is funneled into a rainy-day fund, an income tax hike may lead to an even steeper roller-coaster pattern for the state’s finances.