Trying to squeeze more money out of the top income earners is a poor fiscal strategy, whether you’re looking to close budget deficits or to subsidize pet projects. Even where the tactic accomplishes its stated purposes in the short term, soaking the rich creates an unreliable revenue stream that risks driving wealthy residents, and even businesses, to other states with more accommodating tax structures.
The latest revenue-raising proposal out of Beacon Hill falls squarely into that category.
Under the Massachusetts plan, a mere 19,600 tax filers, in a state of nearly 7 million, would pay a new and higher rate. Of that fraction, a mere 900, who are projected to make more than $10 million annually, would be responsible to contribute 53 percent of new tax revenues, or roughly $1 billion of the additional $1.9 billion projected from the surtax. A smaller fraction still, the top 100 earners in the state, would see their state income taxes rise from an average of $5 million to $9.3 million annually.
The additional revenue is slated to fund transportation infrastructure and the commonwealth’s educational systems, but the promise of support rests on the none too certain assumption that those residents subject to the surtax will actually pay these higher rates for the privilege of continuing to live in the Bay State.
Analysis by the Massachusetts Taxpayers Foundation (MTF)—the state’s pre-eminent public policy organization dealing with state and local fiscal, tax and economic policies—found that if just one-third of the 900 tax filers projected to make more than $10 million annually were to relocate, total income tax revenues would drop by approximately $750 million. Such a shift would blow a hole in the budget.
It is not as though there’s no precedent for exactly this. Massachusetts enjoyed a windfall when General Electric moved its headquarters north from Connecticut. The reason for the move was clear enough. Data from the Tax Foundation, an independent tax-policy nonprofit, ranks Connecticut 43rd of the 50 states in terms of tax climate (Massachusetts ranks 27th). But one cannot help but wonder if GE would have made the move if the “millionaire’s tax” was pending, as it is now.
What the proposal lacks in policy wisdom, it also lacks in terms of a firm legal foundation. There is an open question about its constitutionality.
As written, the proposal violates the state Constitution because it is, in fact, a budget appropriation. Article XLVIII (48) of the Massachusetts Constitution lays out the guidelines for ballot initiatives and prohibits the use of such initiatives to make specific appropriations. Article 48 also mandates that ballot initiatives must have a common or related purpose. Education and transportation are unrelated matters, just as raising and appropriating funds are two separate actions. As written, this measure unconstitutionally binds voters who might want to vote for increased revenue generation, but would like it spent differently. With no precedent for this situation, it may be destined for a lengthy judicial controversy.
If, somehow, the initiative were to become law and survive judicial scrutiny, the people of Massachusetts would have real trouble undoing their mistake. Because the tax, as contemplated, would be passed in the form of a constitutional amendment, it would take a subsequent amendment to undo the millionaires’ tax. That would involve legislative approval of a subsequent constitutional amendment and a vote on the next general election ballot. In fact, should the initiative pass, the earliest a change could be made would be Jan. 1, 2023.
The need for flexibility is amplified in a region in which residents can travel from one state to the next in a matter of minutes. Consider Massachusetts’ neighbor, New Hampshire. The Tax Foundation ranks the Granite State seventh on the list of the 10 states with the best overall tax climates. New Hampshire politicos are not naïve. They certainly would work to capitalize on this misstep in “Taxachusetts” in a manner that should be familiar to our neighbors in Connecticut.
Massachusetts, and state legislatures across the country, should stop looking to the wealthy to solve budget and infrastructure woes. Even the best laid plans have unintended consequences, and targeted tax hikes on a state’s highest earners can be disruptive to both businesses and individuals. The Bay State can and should avoid the uncertainty inherent in this budgeting approach. Its long-term fiscal health depends on it.
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