Study Shows the Adverse Effects of Graduated Income Tax Proposal on Small Businesses

Share on Facebook
Share on Twitter
Share on
LinkedIn
+

This report received coverage in The Boston Herald.

BOSTON – The state constitutional amendment promoted by the Massachusetts Teachers Association and the Service Employees International Union to add a 4 percent surtax to all annual income above $1 million will adversely impact a significant number of pass-through businesses, ultimately slowing the Commonwealth’s economic recovery from COVID-19, according to a new study published by Pioneer Institute.

If the surtax passes, it will apply to as many as 13,430 of the state’s pass-through entities. These are often small businesses structured as S corporations, sole proprietorships and partnerships, which pay taxes via their owners’ personal returns. Proponents claim the surtax would only affect Massachusetts’ highest-paid corporate executives, but in reality, many independent business owners will also be directly affected.

“The past year has been a historically difficult time for a lot of ‘Main Street’ business owners in Massachusetts,” said Nina Weiss, who authored “The Graduated Income Tax Trap – A Tax on Small Businesses,” with Greg Sullivan. “This is a time when we should be prioritizing the resilience of the state’s economy and getting people back to work, not raising taxes on small businesses.”

Before the pandemic, Massachusetts saw significant growth driven by pass-through entities. From 2010 to 2018, the number of pass-through employers in the Commonwealth grew by 11.3 percent. By 2018, they accounted for 57.1 percent of Massachusetts’ private sector workforce. Nationally, pass-through entities represent 95 percent of businesses.

Academic research has confirmed that business activity among pass-throughs is heavily influenced by tax policy. A 2000 National Bureau of Economic Research paper pointed to the federal Tax Reform Act of 1986 as a major factor in the modern renaissance of pass-through entities. A more recent study of several European countries found that greater tax progressivity is associated with lower rates of business formation among the wealthy.

Business groups in Connecticut and New Jersey have first-hand experience of the effects of higher income tax rates, which can deter business owners from hiring more employees or purchasing new equipment. Regarding the 2020 millionaires tax passed in New Jersey, the Tax Foundation suggests that “when many businesses are struggling to survive and meet payroll, cutting into the profits of businesses that are staying afloat is the opposite of an economic recovery strategy.” In 2019, Connecticut even tried to target only pass-through businesses for an income tax hike, stoking significant opposition from multiple trade groups, including the Connecticut Society of CPAs.

“Promoters of the surtax always point to its impact on some nebulous ‘millionaire,” said Pioneer Institute Executive Director Jim Stergios. “The tax will impact many more people and small businesses, and through them, tens of thousands of employees. The state economy is at a crossroads, and our elected leaders will either prioritize job creation and investments in our future, or at the expense of recovering small businesses, they will choose to prioritize public sector employment, which is a relatively small portion of the Massachusetts workforce.”

About the Authors

Nina Weiss is a Roger Perry Research Intern at the Pioneer Institute. Research areas of particular interest to Ms. Weiss include education and transportation. She is currently a student at Johns Hopkins University studying Sociology and International Relations.

Gregory Sullivan is Pioneer’s Research Director. Previously, he served as Inspector General of the Commonwealth of Massachusetts and was a 17-year member of the Massachusetts House of Representatives. Greg is a Certified Fraud Investigator, and holds degrees from Harvard College, The Kennedy School of Public Administration, and the Sloan School at MIT.

About Pioneer

Pioneer’s mission is to develop and communicate dynamic ideas that advance prosperity and a vibrant civic life in Massachusetts and beyond.

Pioneer’s vision of success is a state and nation where our people can prosper and our society thrive because we enjoy world-class options in education, healthcare, transportation and economic opportunity, and where our government is limited, accountable and transparent.

Pioneer values an America where our citizenry is well-educated and willing to test our beliefs based on facts and the free exchange of ideas, and committed to liberty, personal responsibility, and free enterprise.

Get Updates on Our Economic Opportunity Research

Related Posts

Study Warns that New Hampshire Tax Policies Would Exacerbate Impacts of a Graduated Income Tax

Drawing on migration patterns between Massachusetts and states like Rhode Island and Tennessee, Pioneer Institute is releasing a study showing a direct correlation between personal income tax rates and household domestic migration patterns between 2004 and 2019. The study suggests that instituting a graduated income tax will shrink the tax base and deter talented workers and innovative employers from coming to and staying in the Bay State.

Study Finds SALT Deduction Cap, Graduated Income Tax Will Combine to More Than Double Tax Burden on Some Households

A provision of the federal Tax Cuts and Jobs Act of 2017 strictly limiting deductions for state and local taxes (SALT) will greatly exacerbate the adverse effects of a proposal to create a constitutionally mandated graduated income tax, according to a new study published by Pioneer Institute.

Study Suggests How to Advance Fairness, Predictability of “Payment in Lieu of Taxes” Programs Aimed at Nonprofits

A new white paper by Pioneer Institute calls for increased transparency over the basis for payment in lieu of taxes (“PILOT”) agreements between municipal governments and nonprofit organizations, while also encouraging nonprofits to publicize and expand the community benefits they provide.

Public Statement on Implementation of the Charitable Giving Deduction

Despite being awash in cash, the state Legislature just overrode Gov. Charlie Baker’s veto of a provision to delay by yet another year a tax deduction for charitable donations. Rep. Mark Cusack, House chair of the Joint Committee on Revenue, said “it doesn’t mean no, just not now.” If not now, when?

Study Says Massachusetts Surtax Proposal Could Reduce Taxable Income in the State by Over $2 Billion

As voters now begin to weigh the potential impact of a ballot proposal to increase taxes on business owners, retirees and wealthier households, a new literature review by Pioneer Institute shows that many existing academic studies find that wealthy individuals are particularly sensitive to changes in tax policy. Other studies explicitly warn policymakers that behavioral responses to taxing the rich could erode the tax base and ultimately strain state budgets.

This Is No Time for a Tax Increase

This is no time to threaten Massachusetts’ prospects for an immediate economic recovery and the long-term competitiveness of the Commonwealth’s businesses. As Massachusetts lawmakers prepare to vote on whether to send a proposed constitutional amendment that would impose a 4 percent surtax on residents who earn $1 million or more in a year to the statewide ballot in 2022, Pioneer Institute urges them to recognize that tax policy sizably impacts business and job location decisions and that jobs are more mobile than ever.

Study Finds Deep Flaws in Advocates’ Claims that the Massachusetts Tax Code is Regressive

Proponents of a state constitutional amendment to add a 4 percent surtax on all households with annual income above $1 million frequently cite 2015 data from the Institute on Taxation and Economic Policy, which argues that the Massachusetts tax code is regressive, but a new study published by Pioneer Institute debunks many of the underlying assumptions used in ITEP’s 2015 report.

Study Says Interstate Tax Competition, Relocation Subsidies Exacerbate Telecommuting Trends

A spate of new incentive and subsidy programs seeking to lure talented workers and innovative businesses away from their home states could constitute an additional challenge to Massachusetts’ economic and fiscal recovery from COVID-19, according to a new study published by Pioneer Institute.

7 Reasons to Reject the Graduated Tax and Instead Focus on Growing Jobs

Pioneer Institute's Statement before the Joint Committee on Revenue In Opposition to: HB 86 (Pages 1-4), a legislative amendment to the Constitution to provide resources for education and transportation through an additional tax on incomes in excess of one million dollars.

Study Warns Massachusetts Tax Proposal Would Deter Investment, Stifling the “Innovation Economy”

A state constitutional amendment promoted by the Massachusetts Teachers Association and the Service Employees International Union adding a 4 percent surtax to all annual income above $1 million could devastate innovative startups dependent on Boston’s financial services industry for funding, ultimately hampering the region’s recovery from the COVID-19 economic recession, according to a new study published by Pioneer Institute.

Study Shows the Adverse Effects of Graduated Income Tax Proposal on Small Businesses

The state constitutional amendment promoted by the Massachusetts Teachers Association and the Service Employees International Union to add a 4 percent surtax to all annual income above $1 million will adversely impact a significant number of pass-through businesses, ultimately slowing the Commonwealth’s economic recovery from COVID-19, according to a new study published by Pioneer Institute.

Study: Graduated Income Tax Proposal Fails to Protect Taxpayers from Bracket Creep

The state constitutional amendment proposed by the Service Employees International Union and the Massachusetts Teachers Association to add a 4 percent surtax to all annual income above $1 million purports to use cost-of-living-based bracket adjustments as a safeguard that will ensure only millionaires will pay. But historic income growth trends suggest that bracket creep will cause many non-millionaires to be subject to the surtax over time, according to a new study published by Pioneer Institute.