Millionaire’s Tax: Fairness or Folly?

Thursday, June 14, 2018
Section Review: Taxation Law

Introduction 

In April, the Taxation Law Section Council of the Massachusetts Bar Association sponsored a debate at the Boston University School of Law on the upcoming ballot question regarding whether to amend the state constitution to charge a 4 percent surtax on the income of any taxpayer over $1 million. The surtax would apply the revenues collected to transportation and education, subject to appropriation. Massachusetts-sourced capital gains and earned income would be subject to the 4 percent surtax, but gains and income earned outside of Massachusetts would not.

Peter Enrich, who argued in favor of the referendum, is a professor at the Northeastern School of Law, and one of the authors of the referendum through his work as counsel to the Raise Up Massachusetts coalition.

Jeff Jacoby, who argued against the referendum, is an op-ed columnist for The Boston Globe

Michael Grem of the Tax Council served as program chair, and Thomas Collins and David Saliba of the Tax Council were the moderators.  

The following are some highlights from the debate.

1. Will the Proposal Make the Massachusetts Tax System Fairer?

EnrichPeterEnrich: The bottom 95 percent of Massachusetts taxpayers pay 9-10 percent of their income in sales, property and income tax, while the highest earners pay far less of a share of their income in taxes. The proposal will make the overall tax system in Massachusetts less regressive by causing millionaires (the top 0.5 percent) to pay more of a percentage of their income to the state. Current tax revenues in Massachusetts are not high enough to meet the needs for better state schools and colleges, and to address transportation infrastructure. The new tax will address these needs.

JacobyJeffJacoby: The proposal, if adopted, would result in an 80 percent rate hike on Massachusetts millionaires and make Massachusetts the second highest-taxed state in the union (up from 38th). Adopting the proposal will hurt the commonwealth by its failing to attract new businesses and losing wealthier taxpayers to states with lower taxes, such as Florida. The current tax rate of 5.1 percent was reduced from 6.25 percent and is low enough to attract people to the state. Massachusetts has created three times as many jobs as were lost in the recession, unlike Connecticut, a high-tax state that never recovered from the recession. In addition, the Massachusetts Constitution prohibits progressive tax rates, and voters have already voted five times to reject a graduated tax system.  

The Massachusetts income tax is already progressive because millionaires, who earn 18.8 percent of the income of the commonwealth, pay 29 percent of the total income tax revenues in the state. Higher earners already pay more than their fair share.

EnrichPeterEnrich: It is doubtful that many millionaires would leave the state if the proposal passed. Some econometricians state higher earners are less likely to move because of tax rates, finding that 2.4 percent of millionaire households move out of the state annually and only 2 percent of that 2.4 percent move because of taxes. Most millionaires would stay in Massachusetts if the proposal passed. California and New York have not seen an exodus of millionaires.

2. Would the Proposal Have a Negative Effect on the Massachusetts Economy?

JacobyJeffJacoby: Raising taxes on the most productive residents will hurt the state economy because Massachusetts would become one of the highest-taxed states in the U.S. if the proposal passed. Econometricians’ studies are not a certainty, and for those millionaires who leave the state, economic considerations are important. One major flaw in the studies is that they do not take into account taxpayers who have millions of their net worth tied up in assets (such as houses, businesses, etc.). When these taxpayers want to cash out, they do not want to be Massachusetts residents, taxed at a higher rate. A Gallup poll revealed that residents living in high-tax states more often say they want to leave that state. In Connecticut, for example, companies and residents are leaving because of its tax burden. Moreover, states like Florida heavily recruit high-net-worth taxpayers to move to their state to avoid taxes. Millionaires are very mobile and it is not smart or fair to the state economy to let them migrate out of the state.

EnrichPeterEnrich: If you sell a house in Massachusetts, you owe Massachusetts taxes no matter where you live. The Gallup poll cited is not looking at only the highest earning 0.5 percent. The econometric evidence is valid. Businesses look at Massachusetts for its transportation infrastructure and educated workforce before relocating here, not taxes. The Massachusetts education system is one of the best in the country but with wide variations from district to district. Transportation in Massachusetts by “T” is badly broken. Bridges and highways need work. Failure to keep up transportation and education is what will hurt the Massachusetts economy.

3.   How Can Voters Be Assured of What They Are Voting For, Given the Ambiguities in the Language of the Proposal?

EnrichPeterEnrich: Courts would interpret the constitutional language of the proposal. The language is clear. The funds raised by the new tax can only be spent on transportation and education, although the Legislature has to appropriate those funds to specific categories of transportation and education needs before the funds can be expended. The courts would interpret the spending as limited to schools and transportation and nothing else.

JacobyJeffJacoby: The voters cannot know what the state Legislature would do regarding spending for transportation and education, and the proposal does not clarify this. The state already spends 20 percent of its budget ($10 billion) on transportation and education. The proposal does not guarantee that revenues collected from millionaires would add to the amounts already raised for transportation and education, because there is nothing in it that prohibits the Legislature from reducing overall spending to transportation and education. Other ambiguities include what “education” means. Does it refer to teachers’ pay? Security guards? MCAS training? Also, the $1 million threshold set in the proposal may eventually apply to many more people in a few years.  

4. Is It Appropriate to Fund Designated Public Needs by a Constitutional Amendment Addressing Subjects (Revenue Collection and Spending) that May Not Be “Mutually Dependent?”

JacobyJeffJacoby: Article 48 (the initiative process) of the Massachusetts Constitution requires a referendum to have a coherent purpose, and prohibits unrelated factors to be mixed in the same referendum. Tax rates on high earners, education spending and transportation spending are three unrelated topics. It is unfair to ask voters to opine on all three issues in one question.


EnrichPeterEnrich: The referendum is now before the Supreme Judicial Court, and it is not clear how the court will rule. Article 48 of the constitution requires the subjects of the proposal to be “related or mutually dependent,” not that they refer to a single subject. For example, the SJC examined a proposal to end greyhound racing combined with the application of criminal penalties for the abuse of dogs. The SJC ruled that one cannot tag on an unrelated matter (abuse of dogs) to a referendum question (ending greyhound racing). The SJC looks at interrelatedness. Raising revenues is interconnected to transportation and education spending. Making tax policy with an amendment to the constitution is acceptable under Article 44 of the constitution.

JacobyJeffJacoby: Using litigation and the referendum process to amend the Massachusetts Constitution are inefficient ways to change the law. Mistakes in statutes can be changed quickly, but changing a constitutional mistake takes a minimum of five years.