New millionaires tax could yield $2.2 billion for Massachusetts, DOR says
BOSTON — Bay State millionaires could pay as much as $2.2 billion in additional state income taxes under a proposal to tax some of the state's wealthiest individuals and families at a higher rate, a figure considerably higher than what proponents initially projected.
The tax on incomes above $1 million, which would require a series of steps to amend the state's constitution and would not take effect, if approved, until at least 2019, has been pitched as both a way to address income inequality and generate new revenue for education and transportation.
The coalition behind the ballot campaign initially estimated that the higher income tax would fall on roughly 14,000 individuals and generate between $1.3 billion and $1.4 billion.
An analysis done by the Department of Revenue, however, pegged the additional tax revenue that could be generated at $1.6 billion to $2.2 billion, with $1.9 billion identified as the median.
Furthermore, the $1.9 billion tax increase would be paid by roughly 19,500 filers, half of 1 percent of all tax returns filed with the Department of Revenue. Eighty-six percent of the affected taxpayers would be married couples filing jointly, and 11 percent would be individual filers with earnings over $1 million.
The revenue department also said its estimates do not account for how the new tax policy would impact decisions made by wealthy individuals and business owners on where to live or locate their businesses.
"Please note that there is a great deal of estimation uncertainty, given that many factors may affect revenue impact significantly but are unpredictable and often difficult to measure," revenue officials cautioned, suggesting that the department can't predict how the higher income tax would impact decisions on "migration, consumption, investment, business location, etc."
Massachusetts Budget and Policy Center President Noah Berger, whose research has been used and cited by the Raise Up Massachusetts coalition, said he believes the DOR estimate is the "newer" and "most accurate" projection, and accounts for inflation between now and 2019. If valued today, Berger said the revenue estimate would probably be closer to $1.7 billion.
"I think that it means that there's lot of income over a million in Massachusetts. The number is what it is," he said.
MassBudget reports that from 1979 through 2011, incomes for the highest 1 percent of earners in Massachusetts grew at a rate 10 times faster than the bottom 90 percent, capturing almost half of all income growth in the state during that period.
The proposed constitutional amendment, which would apply a new 4 percent tax on all income above $1 million, would bring the effective tax rate for the top 1 percent of earners closer to that of the rest of the population when accounting for local and state taxes. The DOR estimates assume that by 2019 the state income tax will have fallen, based on statutory triggers, to 5 percent.
The Raise Up coalition said it gathered more than 157,000 signatures using only volunteers in support of putting its question before voters on the 2018 ballot. The group plans on Tuesday to rally outside the State House before submitting its locally certified signatures to the Secretary of State's office.
Asked about higher projections for potential new tax revenue, a coalition spokesman Steve Crawford said, "The DOR estimates are in line with our early estimates when adjusted for inflation and are appropriate given the Commonwealth's need for investment in transportation and public education."
A release sent out by the coalition on Monday still used a lower figure of "more than $1.5 billion" in projected new revenue that could be spent on education and improvements to the state's transportation infrastructure and public transit systems.
Because state income taxes are deductible against federal income taxes, the Department of Revenue also estimated that those impacted by the millionaires' tax would see some of the increase offset by lower federal income taxes. The department estimated that federal income taxes paid by Massachusetts millionaires would fall between $400 million and $800 million in 2019.
"Because of the federal offset, the federal government effectively ends up paying about one third," Berger said.
While the concept of applying a higher income tax rate to earnings over $1 million would be new for Massachusetts voters, past proposed amendments that would have allowed the state to impose a graduated income tax, rather than a flat tax, have all failed.
Senate President Stanley Rosenberg, in a recent interview with WGBH reporters on "The Scrum" podcast, attributed past rejections to the idea many people believe they might be a millionaire someday and don't want to see taxes raised.
He said he also believes people are fearful of giving the Legislature "unfettered" permission to play with tax brackets, and get convinced to oppose the change by those "who have the most to lose" and spend "a lot of money to convince people it will be bad for them."
"I want them to be ready to take action and work with their government to take action to make things better. So will we for the fifth or sixth time in the last 25 years vote down a change in the Massachusetts constitution that's designed to make the tax system fairer so that people will have the resources in the government to support them and their families, or will they vote against their own interests again as they have done three or four times in the past not knowing quite why it doesn't feel like this is a good idea but just knowing that I got to vote this down?" Rosenberg said.
Using an analogy for the working class of a frog in a pot of water that gradually has the heat turned up until it dies, Rosenberg said the challenge of moving to a graduated income tax system requires convincing the public that the status quo hasn't been working.
"If people go back and they realize that since 1978 our standard of living has been dropping gradually for the average person and that they can actually do something about it, will they? Will they and will they work with us to do that?" he said.
Rosenberg presides at the Constitutional Convention where the millionaire's tax amendment will need support from at least 50 lawmakers on a recorded vote to advance to the 2017-18 session and potentially to the 2018 statewide ballot. The convention last met in October and is scheduled to resume on Feb. 3, 2016.