Flat Tax Repeal Could Open Up Debate on Graduated Tax
Flat Tax Repeal Could Open Up Debate on Graduated Tax
A tax expert who has been involved with Massachusetts tax policy for years suggested Wednesday that lawmakers could scrap the idea of a Constitutional amendment to impose a surtax on household income over $1 million and instead repeal the Constitution’s requirement for a flat tax and impose the graduated income tax rate through traditional legislation.
Democrats on Beacon Hill have been working for years to establish a 4 percent surtax on annual income greater than $1 million by putting a Constitutional amendment to that effect before voters. The process is more complicated than it is for a normal piece of legislation because the state Constitution currently requires that a tax on income be applied evenly to all residents, so the so-called Millionaires Tax would be unconstitutional as a standalone law.
Jane Steinmetz, office managing principal of Ernst & Young, said she thinks it is bad tax administration to enshrine a tax rate into the state Constitution. If the Legislature wants to go forward with a graduated income tax, she said, lawmakers should repeal Article 44 of the Constitution and write the surtax provision directly into Chapter 62 of the Mass. General Laws, which deals with the taxation of income.
“When you have a tax change, there are these unintended consequences,” Steinmetz, who was appointed by then-Senate President Therese Murray to a special commission that studied corporate tax issues in 2007, said. “If we etch this in constitutional stone and there’s these unintended consequences, you can’t just amend the Constitution. It could take four years.”
Steinmetz, who did not stake out her own position on the issue, and Stanford University finance professor Joshua Rauh discussed some of the potential consequences of the Massachusetts income surtax Wednesday during a virtual event hosted by Pioneer Institute and the Mass. High Tech Council.
In June 2019, House and Senate members voted 147-48 in favor of the Constitutional amendment (H 86) that would impose a 4 percent surtax on annual household income greater than $1 million.
That amendment must also win at least 101 votes of support among the 200 state legislators at a Constitutional Convention in the current legislative session in order to go before voters on the November 2022 ballot.
Supporters of the surtax say it could generate as much as $2 billion per year for education and transportation in Massachusetts without dipping into the pockets of most residents. But critics have long said it could prompt wealthy residents to move out of the Bay State and encourage employers to steer clear of Massachusetts.
“Maybe people hear this discussion and think, ‘gee, high-income people, these are millionaires, who really cares if they leave or they reduce their income, does it really matter?’ Well, the fact is, it does really matter,” Rauh, a Newton native, said.
A 2012 referendum in California raised the top tax rate for the state’s highest earners, Rauh said, which was followed by “a big spike in departures of high-income people.” Compared to the rate of departures before the initiative passed, he said, the rate of departure doubled following the tax rate hike.
“The other thing we found that had maybe even more of an economic consequence was that for people who stayed in California who were high earners, the income that they were reporting to tax authorities really leveled off compared to the income growth that we saw from taxpayers who were located in other states but who were comparable to these taxpayers who were in California,” Rauh said, citing his own research. “And on balance, what we found was that within a couple of years around 60 percent of the state’s expected windfall revenue gain from this tax increase was actually eroded away by this combination of people leaving and also high-income earners apparently reporting less income to the state.”
A previous Pioneer Institute event looked at how remote working opportunities made popular during the COVID-19 pandemic could encourage people to leave Massachusetts for low-tax states like Florida and New Hampshire, but Steinmetz said Wednesday that the Congressional response to the pandemic and its economic impacts — especially the appetite for federal tax increases among Congressional Democrats and the White House — also bears consideration.
The importance of looking at the totality of the circumstances
“We’re talking about this 4 percent surtax, but when individuals are thinking about their tax bill, they’re thinking about it in totality. So as these tax proposals move forward at the federal level, the Mass. Legislature has to really watch them and analyze how those potential increases might impact what a surtax could do here in Massachusetts,” she said.
Steinmetz also pointed out that Massachusetts is not exactly hurting for revenue at the moment. Fiscal year 2020 ended about $120 million short — “which is close to breakeven, but it’s still a shortfall,” she said — and fiscal year 2021 “seems to be doing fine,” with the state having collected $1.123 billion more from taxpayers in the first eight months of the budget year than it did the previous year.
On top of that, she said, is a deluge of billions of dollars in federal funding, some of which comes to the state under the restriction that it not be used to directly or indirectly offset a tax cut.
“We’ve gone on this crazy rollercoaster ride through COVID-19 and now we’re coming out of it and there’s largely a reset button being hit,” Steinmetz said. She added, “So it’s a real important decision for the Mass. Legislature to make about do we move now, or do we kind of pump the brakes a little bit and move forward maybe 12 months from now and see how this reset worked itself out because it would be hard to adjust taxes on a go-forward basis. “
Rep. Jim O’Day, the House sponsor of the amendment, expressed a desire to take the issue up sooner rather than later this session and said he has no reason to believe that the 19 new members of the Legislature this session will significantly alter the support for the measure.
“I’ve not heard anything overwhelming at all from any of my new colleagues other than asking if we were doing the amendment again,” he told the News Service in February. “If anything, the newer members have been interested in being able to sign on to that.”
Senate President Karen Spilka has until May 12 to convene a new Constitutional Convention.
