Will Taxachusetts Pass the Millionaires’ Tax Amendment?
Massachusetts millionaires have been placed at the center of a political debate which is expected to extend over the next few years. State legislatures are deciding whether or not to implement a new tax on these wealthier citizens and even with much of the state in favor of this additional tax, tensions are rising as both sides of the issue present their arguments.
The new proposed legislation would call for an amendment to the state constitution allowing Massachusetts to create “an additional tax of4% on that portion of annual taxable income in excess of $1,000,000.” Only income that exceeds $1 million would be taxed if the amendment is passed (i.e., if you make $1,000,001, the additional tax would befour cents). The $1 million bases would also be adjusted annually for inflation. The state’s current income tax rate for individuals is 5.1%, meaning this would be an almost 80% increase to the current income tax rate. This is in addition to short-term capital gains and certain long-term capital gains that are already taxed at 12%. A Suffolk University/Boston Globe poll shows 69.80% approval from Massachusetts voters for this new tax.
Roughly 20,000 households in the state would be affected; meaning 99.5% of Massachusetts households would see no change in their taxes as a result of this proposed amendment. While the vast majority of households would remain the same, approximately 3,000 small businesses who file under the individual income tax system would see their taxes impacted by this change.
“Raise Up,” the group that initiated the petition for this amendment, gave the following reasons for the millionaires’ tax:
- Legislators are scrambling to fill state budget, leaving little for education and transportation.
- Awage gap in Massachusetts is on the rise.
- For state and local taxes, wealthier families pay a lower effective tax-rate than middle class. The top 1% (those making over $860,000) pays 4.9% of its income to state and local taxes while the middle 20% (those earning $44,000-$70,000) pays approximately 9.3% of its income in state and local taxes. Most of this inequality comes from property, sales, and excise taxes.
- New tax could raise revenue and make the system more fair (supporters call it the “Fair Share Amendment”).
The amendment has strict language that dictates all funds from this tax (estimates are between $1.6 billion to $2.2 billion annually) must go to education and transportation in the state of Massachusetts, with lawmakers deciding where specifically the money will be allocated.
However, opponents claim this doesn’t necessarily mean the state will increase its investment in education and transportation. With the tax’s revenue going towards education and transportation, money that usually goes into these areas would now be freed up and could be channeled elsewhere, meaning total funds allocated for education and transportation might not change at all.
During the initial voting on May 18, 135 out of 200 state legislators approved the amendment, but they must approve it again in the 2017-2018 legislative sessions (only 50 of the state’s legislators are needed to pass the amendment when they vote on it again) before it can go out to a ballot in November 2018. This means the earliest it could be implemented would be 2019. If there are any errors or ambiguities that need clarifying during the coming debate, fixing the re-amendment could involve another four-year process.
Similar proposals for a statewide progressive tax have been turned down five times in past years. Legislatures have worked hard to move the state away from its old moniker of “Taxachusetts” for decades now, but this amendment could be considered a step back into that direction. Many believe that relying on the wealthier households could make state revenue more volatile, and could lead to disaster if high income residents decide to move. This was the case for one billionaire resident of New Jersey that changed his domicile to Florida and cost the Garden State hundreds of millions of dollars in lost payments according to certain tax experts. If the amendment were to pass, some think it could cause Massachusetts to become less competitive and less attractive to businesses compared to other states. Others claim that the tax is unfair and biased and goes against the belief that Massachusetts is a nondiscriminatory state in all regards. State Senate Minority Leader Bruce Tarr claims that the state has, “embraced the theory that all the citizens of Massachusetts are equal, and taxation [should] be applied equally.” With all of this being taken into consideration, passing this amendment will be a point of contention for months to come here in Massachusetts.
For more information or questions, pleasereach out to our National Tax Services Team at [email protected].
Author:
Robert Traester, CPA | [email protected]
Susan Murphy, CPA | [email protected]
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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