The Lowdown on the Massachusetts “Millionaires Tax” Ballot Question

An expert at Tufts’ Center for State Policy Analysis gives a detailed—and nonpartisan—explanation of Question 1

Preparing to vote on Election Day can be a daunting process. As political ads and mailers make arguments on either side of ballot referendum questions, it can sometimes be difficult to determine what the questions are in fact asking, and what the true impact of a “yes” or “no” vote is. That’s certainly the case in Massachusetts this November.

The Center for State Policy Analysis (cSPA) at Tufts University’s Tisch College of Civic Life conducts nonpartisan expert analysis of legislative and electoral policy issues in Massachusetts. It has published a series of reports on the four questions on the Massachusetts 2022 election ballot, including those on dental insurance, liquor licenses at chain retail locations, and drivers’ licenses for undocumented residents.

Tufts Now talked with Evan Horowitz, executive director of cSPA, about Question 1, which asks voters to decide the fate of a proposed “millionaires tax.”

Tufts Now: What is Massachusetts Question 1—to so-called “millionaires tax”—asking? What would a “yes” vote do?

Evan Horowitz: Think of it as the state’s version of a driving question in U.S. politics: should we raise taxes on people with very high incomes and use the money to expand government programs?

This version comes with some Massachusetts-specific twists. For instance, our state constitution doesn’t allow us to tax people at different rates. The only way to increase taxes on the highest earners is to change the state constitution.

That’s exactly what Question 1 does. It adds a new paragraph to the state constitution which places a 4 percent surtax on all income over $1 million. And it stipulates that all money raised by this surtax must be spent on public education, transit, and transportation.

How much revenue is the commonwealth projecting to earn if the tax is implemented, and is there a concern that the wealthiest  residents would move out of state?

It’s surprisingly complicated to figure out how much money this tax would raise.

You can’t just look at how many people earned $1 million last year and see what you’d get by applying the new 4 percent surtax. Once the tax is in place, people are going to change their behavior.

Some high earners may decide to leave the state. It’s not a big number—judging from what’s happened in other states with similar taxes—but there will be some.

A far larger number of folks will seek creative ways to avoid paying the tax. Maybe they’ll cut back on work, maybe they’ll give more to charity, or maybe they’ll restructure their businesses.

There are a lot of possibilities, but the pressures around tax avoidance will be high. After all, the people subject to the millionaires tax are extremely high earners with the resources to hire tax attorneys.

Taking all this into account, we found that the tax would raise about $1.3 billion per year. Other estimates range from $1.2 billion to over $2 billion, depending on your assumptions about how dramatically people will change their behaviors.

Is it enough to have a measurable impact on Massachusetts’ transportation infrastructure or on the state education system? Could the revenue be diverted to other budgetary needs?

Raising $1-$2 billion in new revenue is not enough to fulfill all the promises of proponents: expanding early education and improving K-12 and modernizing transit networks and repairing all our bridges. The state budget is $40-$50 billion each year, so we’re talking about an increase of 2-3%.

However, that’s still a substantial amount of money for priorities that citizens care about. And with the right spending priorities, it could make a real difference on targeted issues like racial justice or fixing the T.

Ultimately, legislators will get to decide which priorities to fund, and at what levels. It’s hard to predict the exact impact on the ground.

Additionally, our research on other examples of earmarked funds—like state lottery systems—suggests that about half of the new revenue could actually get diverted to other areas of the budget.

But even that’s not necessarily a bad thing. If the money doesn’t go to education, transportation, and transit, it’ll still be spent on things that legislators choose to prioritize, be it climate issues or tax breaks.

What percentage of Massachusetts residents would be affected by this passing? What would the impact be on independent small business owners? Farmers?

Very few households in Massachusetts earn over $1 million in any given year. Our estimates suggest that only 0.6 percent—or 26,000 households—would pay the millionaires tax in 2023.

It’s worth noting as well that those 0.6 percent of households earn 20% of all the income in the state.

Some of these million-dollar earners consistently collect 7-digit incomes and will pay the tax every year.

But a fair number of folks will cross this million-dollar threshold once—and only once—in their lives, perhaps when they sell a business or liquidate a savings portfolio.

The plight of these one-timers has become a lightning rod in debates, as they cut against the notion that a millionaires tax would only hit the most affluent. But being a one-timer still means that you are collecting a huge windfall, so it’s not clear that a four percent surtax is unfair or unreasonable.

What income is considered for this tax? For instance, it is becoming increasingly common for houses in Massachusetts to sell for over $1 million. Will homeowners who sell have to pay a tax penalty for those home sales?

Generally, the stuff that counts as income for the millionaires tax is the same stuff that counts as income for other tax purposes. Wages, salaries, investment gains, cryptocurrency sales, withdrawals from most retirement accounts—those are all taxable. Gains inside a tax-exempt account like a 401k are not.

But the piece that’s gotten the most attention is home sales, especially given the scale of home prices in Massachusetts.

In the near term, this really isn’t a big concern. Even if you sell your home for $1 million, that doesn’t count as $1 million in income. First, you need to subtract whatever amount you actually paid for your house. On top of which, there’s a big deduction if it’s your primary residence and several other ways to shrink a potential tax bill.

So it typically takes a $3-$4 million dollar home to generate the kind of gains that would be subject to the millionaires tax.

Are there any long-term legislative implications of this proposition that should be considered by voters?

Amending the constitution creates its own set of challenges—because it means the legislature can’t turn around and make adjustments if needed.

Say, for instance, that our research is wrong about the number of people who will move out of state. Maybe the new world of remote and hybrid work allows a much larger cohort of entrepreneurs to seek lower-tax lives, draining dynamism from the state’s economy.

If that happened, and legislators wanted to repeal the millionaires tax, it would require a multi-year process.

Having said that, the legislature would still have a big toolkit for offsetting problem in the interim, like lowering the short-term tax on capital gains or introducing a new tax credit for high earners.

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