Income Surtax Would Be Grave Mistake for Massachusetts

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Income Surtax Would Be Grave Mistake for Massachusetts

Budget, Tax, & Finance Economy | June 4, 2021
By: John Regan

The Massachusetts Legislature has scheduled a vote Wednesday to advance a massive income surtax on thousands of small and medium-sized businesses in the commonwealth.

The tax is ill-considered and threatens to pull the plug on the nascent post-COVID economic recovery in the commonwealth.

Lawmakers meeting in Constitutional Convention are expected to vote on a proposed amendment to the state constitution that would impose an 80 percent surtax on incomes more than $1 million per year. The vote would clear the way for the measure to go before voters in November 2022.

The Legislature voted 147-48 in favor of the proposal in 2019. The House and Senate have to advance the constitutional amendment in consecutive legislative sessions before it can go before voters.

A graduated income tax would take an estimated $2 billion each year from some 17,000 Main Street businesses and other pass-through companies that pay taxes at the individual rate. These companies – including family farms, retail stores and mid-sized manufacturing companies – are already reeling from the effects of the COVID pandemic and the 14-month shutdown of normal business in Massachusetts.

Massachusetts employers provide 3.4 million private-sector jobs at a mean annual wage of $70,010 to the citizens of Massachusetts. Approximately 46 percent of those 3.4 million jobs are in small to medium-sized businesses.

The 3,300 members of AIM respect the will of voters, but look to the Legislature to consider the potential issues surrounding the surtax:

  • The so-called “Millionaire’s Tax” has been an abject failure in other states. Within three years of Maryland enacting the surtax, 40 percent of the state’s seven-figure earners were gone from the tax rolls – and so was $1.7 billion from the state tax base. New Jersey, which adopted its own version of the so-called Millionaires Tax, lost $3.4 billion in adjusted gross revenue from people moving out of the state.
  • Massachusetts is flush with revenue. Tax collections for the first 11 months of the current fiscal year are up 23 percent over the same period a year ago and 14.9 percent over state projections. The commonwealth is also due to receive $5.3 billion in federal COVID stimulus money.
  • Income surtaxes produce far less revenue than supporters project. A 2012 income and sales tax surcharge in California eroded 60.9 percent of new tax revenues by the law’s second year after stifling business activity and withering the tax base.
  • The small and medium-sized companies that form the backbone of the Massachusetts economy have been decimated by the pandemic. The number of Bay State small businesses that are open dropped by 37 percent at the height of the COVID crisis, while total small- business revenue fell 44 percent.
  • A constitutionally imposed tax of this magnitude will undo decades of hard work done by the legislature and the business community to foster a competitive economic environment in the Commonwealth. This provision will send the wrong message to potential investors and innovators who could choose to operate in a different state.

The Massachusetts companies that produced $584 billion worth of goods and services in the midst of a global pandemic last year need the opportunity to get back on their feet – not a punitive tax increase that would leave them down for the count.

Need more information on the surtax proposal? Please contact Brooke Thomson, bthomson@aimnet.org.