Editorial Staff

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

/in , , , , , , /by Editorial Staff
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

New Study Highlights Economic Fallout from California’s 2012 Tax Hike

A 2012 income and sales tax increase in California, named “Proposition 30,” stifled business activity, accelerated out-migration among the wealthy, and ultimately reduced the state’s tax base, according to a new study published by Pioneer Institute that aims to share empirical data about the impact of tax policy decisions.

New Study Finds Pandemic-Spurred Technologies Lowered Barriers to Exit in High-Cost States

Both employers and households will find it easier to leave major job centers as technologies made commonplace by the COVID-19 pandemic have led to a rethinking of the geography of work, according to a new study published by Pioneer Institute.

New Study Shows Significant Wealth Migration from Massachusetts to Florida, New Hampshire

Over the last 25 years, Massachusetts has consistently lost taxable income, especially to Florida and New Hampshire, via out-migration of the wealthy, according to a new Pioneer Institute study. In “Do The Wealthy Migrate Away From High-Tax States? A Comparison of Adjusted Gross Income Changes in Massachusetts and Florida,” Pioneer Institute Research Director Greg Sullivan and Research Assistant Andrew Mikula draw on IRS data showing aggregate migration flows by amount of adjusted gross income (AGI). The data show a persistent trend of wealth leaving high-tax states for low-tax ones, especially in the Sun Belt.

California Tax Experiment: Policy Makers Receive Valuable Economics Lesson

0 Comments
/
Host Joe Selvaggi talks with Stanford University Economics Professor Joshua Rauh about his research on the reaction of Californians to a tax increase, from his report, “The Behavioral Response to State Income Taxation of High Earners, Evidence from California.” Prof. Rauh shares how his research offers tax policy makers insight into the likely effects of similar increases in their own states, including here in Massachusetts.

New Study Finds Tax Policy Drives Connecticut’s Ongoing Fiscal & Economic Crisis

Multiple rounds of tax increases aimed at high earners and corporations triggered an exodus from Connecticut of large employers and wealthy individuals, according to a new study published by Pioneer Institute.

Pioneer Report Spotlights Decade-long Building Boom in Massachusetts Construction Industry

In the lead-up to the COVID-19 crisis, the Massachusetts construction industry enjoyed a boom in select subsectors, though employment numbers had yet to recover from the setbacks of the Great Recession, according to a new report from Pioneer Institute that draws data from the MassEconomix web tool.

Pioneer Checklist Includes Steps for Policy Makers, Business Owners to Revitalize Hardest-Hit Industries

Combining the recommendations of studies published earlier this year, Pioneer Institute has released “A Checklist for How to Revitalize the Industries Hit Hardest by COVID-19.” The recommendations for policy makers are organized in three sections: Immediate Relief, Tax Policy Changes and Permanent Reforms.  Business owner recommendations are split into COVID-19 Health and Safety Protocols, Expanded Services and Steps to Improve Cash Flow.

Pioneer Report Highlights Pre-Pandemic Employment Growth in Massachusetts’ Hospitality & Food Industry

In the lead-up to the COVID-19 crisis, the Massachusetts Hospitality and Food Industry enjoyed generally positive employment growth, according to a new report from Pioneer Institute that draws data from the MassEconomix web tool. Most of the Hospitality and Food Industry employment across the state is concentrated in full-service restaurants and hotels.

Targeted government help for small business is needed

0 Comments
/
Covid-19 will frame economic policy discussions for years to come, just as the Great Recession did a decade ago. The economic impact of the pandemic includes widespread job losses, and millions of Americans are at risk of falling into poverty. Covid-19 is also accelerating pre-existing market trends – such as automation and online shopping – and their potentially devastating impact on the thousands of small businesses vulnerable to these market shifts. Will these businesses be able to adapt?

Pioneer Report Highlights Employment Growth in Lowell, Massachusetts

In 2018, employment in Lowell, Massachusetts finally surpassed its pre-Great Recession peak, according to a new report from Pioneer Institute that draws data from the MassEconomix web tool. Before COVID-19, job growth in the city was driven largely by a resurgence in manufacturing and a continued high concentration of healthcare firms.

Pioneer Report Underscores Wide Disparities in Economic Performance between Industry Sectors in Massachusetts

Service-based industries have significantly outperformed manufacturing and other traditional blue-collar economic sectors in Massachusetts since 2008, according to a new report from Pioneer Institute that draws on data from the MassEconomix web tool. In “Broad Industry Sector Trends in Massachusetts, 1998-2018,” two decades of data show fluctuating employment changes across the state, as well as changes in firm size and the types of firms disproportionately headquartered in the Commonwealth.

Study: Economic Recovery from COVID Will Require Short-Term Relief, Long-Term Reforms

As the initial economic recovery from the COVID-19 pandemic has slowed, a new study from Pioneer Institute finds that governments must continue to provide short-term relief to stabilize small businesses as they simultaneously consider longer-term reforms to hasten and bolster recovery – all while facing a need to shore up public sector revenues.