FORTY-THREE STATES IN this country tax the income of their citizens in some form. Of the states that tax wages, only eight, including Massachusetts, use a single rate rather than a graduated rate. That century-old policy is the main reason why in 2018 the Commonwealth’s voters will likely face a ballot question seeking to impose a “millionaire tax” on the highest-earning taxpayers in the state. It is the kind of question capable of provoking that visceral response so appealing to reality TV producers. There are rational arguments on both sides, but a detached examination suggests that the proposed tax does not accomplish the goals it purports to achieve. There is no guarantee that the new money will go to education and transportation as claimed; it risks driving some top taxpayers out of state; it fails to mitigate the state’s regressive tax system; and it seeks to embed unprecedented language in the state’s constitution. It is an initiative that ought not to pass.
The “Fair Share Amendment” to the state’s constitution proposed by the Raise Up Massachusetts coalition is a clever piece of political engineering. It aims to capture a slice of the contemporary ethos by targeting millionaires who are assumed not to pay enough taxes. If adopted, the amendment will require any Massachusetts taxpayer to pay a surcharge of 4 percent on taxable income in excess of $1 million. The total rate on that income would amount to 9 percent when added to the normal tax, expected to be 5 percent when the amendment would take effect in 2019.
Targeting millionaires is made more attractive by the intent of the amendment to earmark the additional revenue only for public education and transportation infrastructure investments. The Department of Revenue estimates that the new levy could produce approximately $1.9 billion in 2019, an amount that could make a real difference in appropriations for school systems, public higher education, highways, bridges, and public transportation.
Even more appealing, at least to many members of the Legislature, is the political ballet of achieving substantial additional revenue without actually voting for a tax increase or having to override a gubernatorial veto. The Commonwealth’s complicated constitutional amendment process requires only 50 votes in two successive legislatures to put the question on the ballot, so the voters can take responsibility for the decision. In May 2016, the Legislature approved the first required resolution. If a second is approved in the current legislative session, the amendment will appear before the voters in November 2018. It is not surprising that early polling shows a large majority supportive of higher taxes on millionaires.
In addition to the artfully designed political process, the substantive arguments in favor of big earners paying more taxes have some weight. Massachusetts is a wealthy state with high income disparity but, since 1915, the state constitution has required that taxes “shall be levied at a uniform rate throughout the Commonwealth upon incomes derived from the same class of property.” This means that high earners face the same flat tax rate as lower earners. Thus, a constitutional amendment is necessary to impose the 4 percent additional tax on income over $1 million. Under the constitutional limitations now in force, the Legislature could not levy such a tax by statute even if it were inclined to do so.
Five times in the past half century a proposed amendment to allow for graduated income tax rates has appeared on the ballot and has failed each time. In an effort to avoid a similar defeat, the drafters of the current proposal kept the flat tax approach, targeted the increased levy only at millionaires, and aimed the benefits at the popular causes of public education and infrastructure. It’s hard to imagine a better marketing approach.
But the initial appeal of the Fair Share Amendment does not stand up under deeper scrutiny. For one thing, the same constitution that requires a uniform tax rate also precludes the adoption of any amendment that “makes a specific appropriation of money from the treasury of the Commonwealth,” so it is unlikely that the promise to spend the new money on public education and infrastructure is enforceable. The drafters acknowledged this constitutional infirmity by making the new spending “subject to appropriation,” a clause that clearly grants legislative discretion over the money. Even if the Legislature deferred to the perceived intent and appropriated new money for the stated purposes, one can ask why the amendment precludes spending on other pressing priorities, such as water and sewer projects, environmental mitigation, state parks, economic development, services for elders, public safety, local aid, and the state’s chronically underfunded mental health system.
There are other problems. The Department of Revenue expects that 19,500 filers (0.5 percent of all returns) would have taxable income in excess of $1 million in the first year of the new tax. For most of those people the impact is relatively small. But almost two-thirds of the income subject to the millionaire tax is reported on fewer than 4,000 returns. It is these very wealthy taxpayers who would be impacted most, and it’s hard to know how they will respond. In New Jersey, which has a top income tax rate of 8.97 percent, hedge fund billionaire David Tepper moved his legal domicile to Florida, a state without income tax, thereby saving himself tens of millions of dollars a year and creating alarm among New Jersey’s tax forecasters. The risk of his Massachusetts counterparts making a similar move renders the revenue impact unpredictable.
Some argue that the so-called “federal offset” mitigates the impact of higher taxes on high earners, and makes it less likely they would pick up and leave. The federal offset allows high income filers to deduct state and local tax payments from federal returns, thereby lowering their federal tax liability. This has the effect of off-loading the cost of approximately one-third of the proposed millionaire tax to the federal government. From the state’s point of view, this is an attractive gimmick—as long as it lasts. There are persistent efforts by members of both parties in Washington to eliminate or reduce the deductibility of state and local taxes because the deductions are perceived as costly to the federal government and unfair to low-tax states. Eliminating the federal offset is a major priority of House Republicans and President Obama’s fiscal 2016 budget proposal sought to cap but not eliminate the use of the offset in itemized deductions. If the Fair Share Amendment is in place and the offset goes away, the real cost to targeted taxpayers will rise significantly.
Perhaps the oddest thing about the proposed amendment is that it will enshrine in the state constitution a fixed tax percentage on income over $1 million while leaving to statute the rate on lower amounts of income. This is poor constitutional drafting. It is extremely rare for tax rates to be set in a state constitution and it appears unprecedented to insert a permanent surcharge as the ballot question proposes. In Alabama, Georgia, and North Carolina, the constitution sets maximum income tax rates. California had a temporary tax surcharge in its constitution but that, by its own terms, just expired. Massachusetts alone would have a constitutionally mandated millionaire tax and would face a multi-year amendment process if future exigencies necessitated a change.
Another often repeated argument for the millionaire tax—that Massachusetts’ flat income tax creates huge inequity, is misleading. While following its constitutional requirement for a “uniform rate” of taxation on income, the Commonwealth has mitigated the impact by allowing multiple adjustments that benefit lower income people. For example, the lowest earners are not required to pay any tax. Massachusetts’ generosity with credits and exemptions for dependents reduces or eliminates tax liability for many other lower income filers. The state also supplements the federal Earned Income Tax Credit for joint filers with income less than $50,000. According to the Institute on Taxation and Economic Policy, these adjustments resulted in the lowest 20 percent of Massachusetts filers paying an effective state income tax rate of 0.8 percent in 2015. The next quintile pays an average of 2.8 percent and, as income increases, the effective rate steps up to 4.2 percent for the top filers. Massachusetts essentially has a progressive income tax system.
It is nevertheless true that Massachusetts’ overall tax structure is regressive. The main cause of disproportionate taxation of lower income residents is the 6.25 percent sales and excise tax. The relentless arithmetic of the sales tax means that individuals in the bottom 20 percent of the state’s earners pay 3.6 percent of their income in such taxes while the very top earners pay 0.3 percent. A similar but slightly less pronounced regressive impact arises from the way real estate taxes are levied in Massachusetts. All in all, the total state and local tax burden on the bottom fifth of the Commonwealth’s residents is 10.4 percent, little of which is income tax. The proposed Fair Share Amendment will increase the tax assessed on a tiny fraction of the state’s wealthiest citizens, but it will do nothing to ease the tax burden on those at the bottom of the income scale.
The millionaire tax initiative makes three profound assertions: That the state needs new revenue; that the money should come from a surtax on one-half of 1 percent of the state’s taxpayers; and that use of the funds is constitutionally limited to the narrow intentions of the sponsors. The reason we have a Legislature is so that voters do not have to provide a simple answer to such complex and interrelated propositions. Forcing voters to say yes or no can result in bad public policy and unforeseen consequences. Even within the current constitutional framework, the Legislature has the means and the duty to address these important public matters with thoughtful statutes capable of modification based on experience.
I favor progressive taxation and believe it likely that the state will need additional revenue in the years ahead to discharge its responsibilities to the Commonwealth’s citizens. There are multiple ways to achieve those goals but the millionaire tax, as proposed, is a tilted and overly simplistic solution. It does not deserve adoption.
Edward M. Murphy worked in state government from 1979-1995, serving as the commissioner of the Department of Youth Services, commissioner of the Department of Mental Health, and executive director of the Health and Education Facilities Authority. He recently retired as CEO and chairman of one of the country’s largest providers of services to people with disabilities.