False business narrative on millionaire’s tax

IN A RECENT Boston Business Journal article, John Fish, owner of construction giant Suffolk Construction, said that if the state’s voters pass the so-called “millionaire’s tax,” which would provide additional funds for education and transportation, next year, he won’t leave the state, but may look to move some of his business elsewhere. Statements like these, and the editorial accompanying the article, are more scare tactics used to bend lawmakers and the citizenry to business’s will than argument grounded in fact. As a recent analysis of taxation and the wealthy found, “millionaires are not searching for economic opportunity – they have found it.”

In that study, Cristobal Young, a professor at Stanford, examined the migratory habits of the highest income-earners and found that introduction of a millionaire tax surcharge would cause 0.2 percent of the millionaire population to move to a lower-tax state. In fact, in a typical year, just 2.4 percent of millionaires move across state lines, compared to the rest of the population, which moves at a rate of 4.5 percent.

Jon Shure, of the Center on Budget and Policy Priorities, says the idea that millionaires flee high-rate states for states with low tax rates “is almost entirely bogus – it’s a myth.” He adds, “The anecdotal coverage makes it seem like people are leaving in droves because of high taxes. They’re not. There are a lot of low-tax states, and you don’t see millionaires flocking there.”

New Jersey is one example of state tax levels having little to no effect on if and where people move. In 2004, the state created a new tax bracket for income over $500,000, increasing the top tax rate by 2.6 percentage points to a new rate of 8.97 percent. Nearby states continued to have lower rates: New York, 6.85 percent; Connecticut, 5.0 percent; and Pennsylvania, 3.07 percent. Over the next four years, researchers found there was little migration to these lower tax states.

A study from California looked at that state’s millionaire migratory patterns after a “millionaire’s tax” was instituted. The study directly attributed to the tax the outmigration from the state of between 50 and 120 millionaires, a paltry 1.2 percent change in California’s millionaire population. Furthermore, for the three years after the tax was implemented, the number of millionaires continued to rise.

These locales, along with other highly sought after zip codes like those in New York City and in Boston, have not seen a flight of their high-income residents. By one estimate, 99.4 percent of Massachusetts millionaires would continue to reside in the Bay State and pay the higher amount.

By having millionaires pay their fair share, we are not returning to the bad old days of “Taxachusetts.” We are very far from those days.

In New England, only New Hampshire has lower state and local taxes. Moreover, if our tax system was more like the rest of the region, Massachusetts would have an additional $5 billion to $7 billion to invest in residents.

Recently, U.S. News and World Report named Massachusetts its “Best State,” citing the state’s academic achievement, innovative health care system, and strong economy. In fact, Massachusetts’s overall business tax levels are lower than almost 75 percent of other all states. The feigned uproar over greater tax equity is a case of millionaires finally being caught with their hand in the cookie jar.

Pass-through businesses, which are slated to pay more if the vote passes – where profits are “passed through” to the owners’ personal tax forms and business income is taxed at personal tax rates, avoiding the corporate tax – are not “mom and pop” shops. They are sophisticated companies that know how to exploit loopholes to drive down their tax bill. More than 90 percent of American businesses are pass-through, with their total profits greater than those of C-corporations.

By taxing business income at personal rates, S-corporations pay less than their fair share in taxes. In 1980, there were more C-corporation tax returns filed than pass-through businesses; by 2012, there were four times as many pass-through returns as returns from C-corporations.

This is due in no small part to the Tax Reform Act of 1986, which dropped the top personal rate from 50 percent to 28 percent. With C-corporations taxed at a higher rate, this created an incentive for firms to change their tax status, further depriving federal coffers of vital revenue.

Furthermore, S-corporations are able to avoid paying into the social safety net, because owners are able to understate their pay or not take a salary.

For example, consider the sole owner of a small construction firm who earns $500,000 in pretax income. If the owner chooses to pay himself a salary he feels is justified, say, $250,000, and let the remaining $250,000 “flow through,” he would pay not only income tax on the entire $500,000, but also taxes for Social Security and Medicare (as well as a Medicare surtax on earnings above $200,000). However, if he chooses to let the entire $500,000 “flow through,” he is only responsible for paying income tax, avoiding thousands of dollars in payments to the social safety net.

As a civic leader, and as chairman of the board of the Federal Reserve Bank of Boston, Mr. Fish is well aware that over the past four decades, virtually all income growth in the United States has gone into the pockets of people like himself, the top 1 percent of earners, in part due to tax code manipulation. In Massachusetts, the top 1 percent (income over $860,000 per year) has seen large gains over this period. These highest earners pay the smallest share of their income in state and local taxes, 6.5 percent of household income, compared to the 9.4 percent paid by the average Massachusetts household.

There is broad consensus that the foundation of a strong local economy is built on a well-educated workforce with access to a high-quality transportation system. By making these high-earners – the only ones who have seen their incomes grow over the past 40 years, and who have a multitude of ways to avoid paying taxes – pay their fair share, it will allow the state make a greater investment in its best asset – its residents – and work to improve some of the country’s oldest infrastructure. And it will be local businesses that will reap the return on that investment.

Sean Mulkerrin is an engagement fellow at the Massachusetts Coalition for Occupational Safety and Health.