Earlier this month, in a joint session of the Massachusetts House and Senate, the graduated income tax, also known as the “Millionaire Tax,” was voted to be sent to the November 2018 state ballot. Due to the many concerns that I had, I voted against this economic proposal. Some of my concerns surrounded the issues of there being no safeguard to ensure the collected revenue will be allocated to increased support for education and transportation as intended. Additionally, it will hurt our small-business economy resulting in job loss. Not only that, it scares potential employers from relocating to Massachusetts. And lastly, the tax flight theory demonstrates the increased out-of-state migration due to the implementation of a graduated income tax.
Currently, Massachusetts assesses residents’ personal income uniformly at a “flat tax” rate of 5.1 percent, and short-term capital gains at 12 percent. This proposal would amend the state constitution, creating a two-tier tax system that imposes an additional 4 percent surtax on all income in excess of $1 million, effective Jan. 1, 2019, and the revenues would be “allotted” to transportation and education funding. The state constitution explicitly prohibits any amendment that “makes a specific appropriation of money.” However, the proposal attempts to circumvent this limitation by designating the money collected as “subject to appropriation” by the Legislature. Therefore, any and all collected revenue will be placed in the general fund, where its allocation is at the Legislature’s discretion.
During last year’s Constitutional Convention, the House Republican Caucus tried unsuccessfully to amend the proposal to ensure that any funds raised through the surtax would be used “in addition to” rather than “in lieu of” money currently spent on education and transportation, however, because the ballot proposal was not subject to further amendment this year, I expressed my concern that there are no safeguards in place to certify that the funds are appropriately being allocated to education and funding.
In other words, the funds collected could be used to replace existing revenues spent in those areas, resulting in no net spending increase on transportation or education. A comparable situation was the national tobacco settlement money: in lieu of spending the money exclusively on smoking cessation and health-related programs, only a portion of it was spent on those areas.
Many prominent business groups consider the tax proposal to be anti-competitive, indicating that its impact on small businesses and job creation would be detrimental. Despite the populist label of the Millionaire Tax, the main reason to oppose this bill is that it could harm our economy by waging class warfare on our small businesses and job providers, which is a war we all lose. Furthermore, the Massachusetts High Technology Council warned against it, stating that it “could cause irreparable harm to the state’s innovation economy.” Major business groups, such as the Massachusetts Taxpayers Foundation, Associated Industries of Massachusetts and the Massachusetts Competitive Partnership, are now considering legal action.
It is entirely possible that the full $1.9 billion in projected tax revenue will never be accrued. For example, in 2013, Massachusetts implemented a tax hike on the sale of cigarettes, increasing their sale from $2.51 to $3.51 per pack in the hopes of increasing state revenue. Unfortunately, this sales tax failed miserably, and we instead saw a drastic increase in illegal smuggling of cigarettes into the state, as well as an increase in residents driving over the border into New Hampshire to purchase their cigarettes rather than purchase them in-state, and consequently lost out on the projected revenue. Researchers at the Mackinac Center for Public Policy hypothesized that the increase in sales tax on cigarettes led to the drastic spike of illegally purchased cigarettes in Massachusetts, as the percent of cigarettes brought illegally into the state rose from 12 percent in 2013 to 29.3 percent in 2014 after the tax had been implemented.
In response to increases in a state’s average income tax rate, many of the state’s top earners will likely relocate to avoid the new surtax on their income, thus eliminating the primary source of the proposed surtax-generated funding. The state of New Jersey experienced this phenomenon in 2003. According to 2012 findings by the New Jersey Department of the Treasury, the state accumulated a net loss of approximately 18,000 to 28,000 taxpayers who relocated, and suffered an annual income loss of between $2.2 billion and 2.4 billion between 2003 and 2010. New Hampshire Governor Sununu must be licking his chops hoping for us to pass this ballot measure.
Additionally, there is concern of the volatility of capital gains taxes, which are, under the graduated income tax proposal, depended on to provide about $500 million of the new tax revenues. The Massachusetts Taxpayers Foundation noted that in 2002, capital gains tax collections dropped by $670 million and by a whopping $1.65 billion during the recession in 2008. Issues associated with tax hikes are not partisan, and Democratic Gov. Dannel Malloy of Connecticut said it best: “I’ve raised taxes multiple times. It’s not working. And it’s come up a cropper … Spurring economic growth is what’s necessary.”
Historically, graduated income tax ballot proposals have failed in Massachusetts. Between 1962 and 1994, Massachusetts voters rejected five of these ballot initiatives, and the most recent in 1994 was defeated by a margin of more than 2-1. Come November, I urge you to consider all of the facts when considering the graduated income tax ballot question and demonstrate the same wisdom as we have in the past.