I’LL NEVER FORGET my experience as a first-time homeowner of an almost 200-year-old New England charmer. In our late 20s, and open to learning all that we could in order to be good stewards of a historic home, my husband and I were advised to have someone take a look at reinforcing an old floor joist. We had a younger, ambitious engineer come in that wanted to take out the entire floor of that one room and start fresh.
After some serious anxiety, we looked for a second opinion. We next had an older local contractor come in who said he had been working on old houses in the area for decades. He snickered at the diagnosis that the previous engineer had given and said, if you start fresh on this one room’s floor, soon you will have a door upstairs not closing correctly, and other parts of the house shifting which will cause more problems long term. He was right, and gave us a tangible lesson on considering the big picture of potential unintended consequences before taking well-meaning drastic action.
Having spent many years in the policy world, I’ve similarly found it true that nothing can be done in a vacuum. Even when implementing a seemingly well-intentioned policy, unintended adverse effects can soon follow. Luckily, we have some projections on potential economic consequences for one of the policy measures we will all see on this year’s ballot pertaining to a constitutional amendment to implement an income surtax hike.
Back in June of this year, the Beacon Hill Institute completed a study looking into the fiscal and economic effect a 4 percent surcharge on incomes over a million dollars will have on our state. The study looks at what the tax changes embedded in the law will mean in terms of costs to the state’s economy. It found that in the first year of the new tax, over 4,000 families would leave the state along with over 9,000 jobs, with real gross domestic product dropping by $430 million. These losses are projected to stem from outmigration in addition to a reduction in labor hiring and labor-force participation.
After all, this tax won’t simply affect those with salaries over a million dollars, but all taxable incomes. For many small businesses filing as limited liability corporations, this means the same income they use to pay their employees, keep their lights on, and buy goods they need to keep their businesses running. It would also pertain to business owners who instead of investing money into a retirement account, invested in their business and planned to rely on the eventual sale of their business to fund necessities in their old age.
Other overlooked economic consequences will be a decrease in revenue from other taxable areas. The study finds sales tax revenues, at the state level, would fall by nearly $1.5 million in the first year and by nearly $1 million by the fifth year. There would also be a projected drop in local property tax revenues along with other local tax revenues. So, although there would be an increase in state income tax revenues, other areas funded by different taxes on the state and local levels would take a hit.
This study also looked into the promised projected revenue resulting from this new tax increase. Advocates of the measure have advertised that it could bring in up to $2 billion annually, however the study finds that the revenue yield of the tax will be far less, around $1.2 billion in its first year of implementation, due to the expected shrinkage in economic activity.
The Tax Foundation, a non-partisan Washington, DC-based think tank that is considered the gold standard for tax analysis, has also recently published several reports that reinforce The Beacon Hill Institute’s findings. On October 11, the Tax Foundation said its IRS data indicated New York, New Jersey, and California are losing very high numbers of taxpayers. One uniting factor among those states is their graduated income tax structure, the same structure Question 1 is hoping to enact into law here in Massachusetts.
The Tax Foundation report stated, “Several of the states losing higher-income taxpayers, especially New York, California, and New Jersey, have highly progressive tax codes under which tax liability rises steeply with income. States that structure their tax codes in this manner have consistently lost higher-income residents to lower-tax states, and not only the residents, but also any associated tax revenue and entrepreneurial activity that goes along with them,” the Tax Foundation report said.
According to the report, Massachusetts was already ranked fourth in the nation for losing taxpayer population. In fact, our population loss totaled more than all of the other New England states combined.
On October 25, the Tax Foundation released its annual “business tax climate index,” which showed that in 2014, Massachusetts was ranked 26th in the county for business tax climate. Since then, we have consistently dropped each year, ending at 34th in this year’s report. The Tax Foundation warned that if Massachusetts passed Question 1, the state’s ranking would decline to 46th, only behind the state of California, New York, and New Jersey.
During the last few years, other states began to adopt policies that encouraged growth, but Massachusetts did not. As states were adapting to workers working from home, 21 states cut individual income taxes and 13 states cut corporate income taxes, greatly improving their competitiveness, and leaving Massachusetts sliding down in the index. The Tax Foundation report highlights that one of Massachusetts’ most significant redeemable factors is its flat income tax rate, which Question 1 aims to forever alter.
The Beacon Hill Institute and the Tax Foundation make a compelling and clear case for Massachusetts voters to consider when voting on Question 1 and it leaves us with a broader picture of a seemingly straight forward policy change. I recommend checking out the Beacon Hill Institute’s full study here and the Tax Foundation reports at their website.
Laurie Belsito is the policy director at The Fiscal Alliance Foundation.