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

Pioneer Institute Expects That Massachusetts Taxpayers Will Be Refunded $3.2B Due To State Revenue Cap

Pioneer Institute projects that the state will refund approximately $3.2 billion to taxpayers due to a state law sponsored by Citizens for Limited Taxation and voted on by taxpayers in 1986 that caps the amount of revenue the state can collect in any given year.

Survey of Business Sentiment: MA Income Tax Hike Would Lead to Employer Exodus

Nearly three quarters (73 percent) of Massachusetts business leaders think business associates will leave the state if a constitutional amendment appearing on the November ballot to hike taxes is successful, according to a survey conducted by Pioneer Institute.

As States Compete for Talent and Families, Massachusetts Experienced a Six-Fold Increase in Lost Wealth Compared to a Decade Earlier

With competition for businesses and talent heating up across the country, in 2020 Massachusetts shed taxpayers and wealth at a clip six times faster than even just a decade ago. Between 2010 to 2020, Massachusetts’ net loss of adjusted gross Income (AGI) to other states due to migration grew from $422 million to $2.6 billion, according to recently released IRS data now available on Pioneer Institute’s Massachusetts IRS Data Discovery website. Over 71 percent of the loss was to Florida and New Hampshire, both no income tax states.

Book Reveals How Tax Hike Amendment Would Damage Commonwealth’s Economic Competitiveness

If adopted, a constitutional amendment to hike state taxes that will appear on the ballot in November could erase the hard-earned progress Massachusetts has achieved toward economic competitiveness over the last 25 years and may not result in any additional education and transportation funding, according to a new book from Pioneer Institute, entitled Back to Taxachusetts?: How the proposed tax amendment would upend one of the nation’s best economies, which is a distillation of two dozen academic studies.

Study Documents The Design Challenges, Contracting Issues, And Delays Facing New MBTA Fare Collection System

This new study unearths previously unseen communications between the MBTA and its contractors, showing that the MBTA’s efforts to modernize its fare collection system, including allowing payments with credit cards and bringing “tap and go” technology to Commuter Rail and ferry lines, was riddled with technological challenges and difficulties overseeing contractors as early as 2019, culminating in a 3-year delay to the project’s full implementation.

Study: Legislature Likely to Reduce Spending on Education and Transportation from Other Revenue Sources, Replace Cuts with Surtax Money

Revenue from a ballot initiative to amend the state Constitution and raise income taxes on households and businesses by adopting a graduated income tax structure would supposedly provide resources for transportation and public education, but a new study published by Pioneer Institute finds that, were the tax amendment to pass, the money would be fungible and much of it likely spent on general budget measures.   

Study Finds Bus Rapid Transit Can Offer Cost-Effective Benefits

Bus rapid transit (BRT) incorporates unique features such as dedicated lanes to provide reliable and cost-effective service while reducing congestion and its detrimental environmental impacts, according to a new study published by Pioneer Institute.

Pioneer Supports Legal Challenge to Misleading Tax Ballot Language, Releases Video

Pioneer Institute supports the diverse and bipartisan group that filed a complaint with the Massachusetts Supreme Judicial Court (SJC) challenging the summary language meant to provide an accurate description of the tax hike amendment to voters. The language was approved by the Attorney General and Secretary of the Commonwealth when a similar amendment was proposed in 2018, and unless the lawsuit is successful, will likely appear on the Massachusetts ballot in November.

Study Raises Concern That Annual T Fare Evasion Costs Could Rise By More Than $30 Million Under AFC 2.0

According to the Federal Transit Administration (FTA), the MBTA’s $935.4 million fare collection system (AFC 2.0) that is scheduled to be implemented in 2023 will reduce fare evasion by $35 million over a decade. But the T announced in 2021 that evasion could actually increase by up to $30 million under AFC 2.0, and now a Pioneer Institute study warns that insufficient fare enforcement could drive that figure even higher under the new system.

Study: Tax Up For A Vote In November Would Ensnare Over Three Times More Taxpayers Than Previously Estimated

Analyses from the Massachusetts Department of Revenue (MADOR, 2016) and Tufts University’s Center for State Policy Analysis (2022) dramatically underestimated the number of households and businesses impacted by the constitutionally-imposed tax hike that the legislature is putting before voters in November 2022, according to a new study from Pioneer Institute.

Public Statement on Massachusetts High Technology Council’s Challenge to the Graduated Income Tax Ballot Language

The Massachusetts High Technology Council is right to insist on transparency in the language of a tax hike amendment scheduled to appear on the Massachusetts state ballot next year.

Study: “Millionaire’s Tax” Would Have Far-Reaching Effects on “Pass-Through” Businesses

A proposed graduated income tax that will appear on the statewide ballot in November 2022 will have much more far-reaching implications than most people realize because the surtax also extends to “pass-through” income from entities such as S and limited liability corporations, partnerships, and sole proprietorships that are taxed on individual tax returns, according to a new study published by Pioneer Institute.