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

Share on Facebook
Share on Twitter
Share on
LinkedIn
+

BOSTON – 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.

If passed, the surtax would give Massachusetts the highest short-term capital gains tax rate in the nation and the highest long-term capital gains tax rate in New England.

“The particularly punitive aspect of this proposal for investors is that, unlike at the federal level, capital gains can push you into a higher tax bracket under the surtax,” said Greg Sullivan, who co-authored A Grim Distinction: Massachusetts would have top marginal short-term capital gains tax rate in the U.S. under the proposed graduated income tax, with Andrew Mikula. “That could be a significant deterrent to people who would otherwise have invested in small businesses as they emerge from the COVID crisis.”

Research has shown that growth in new “innovation economy” companies exhibits a “multiplier effect” whereby every job created in a high-tech firm supports the creation of up to five more jobs in other sectors of the economy. These other jobs often include low-skill service positions, demonstrating the widespread economic advantages of facilitating private investment in startups. The graduated income tax would provide a powerful disincentive to taxpayers to invest their money in Massachusetts firms.

Pioneer Institute questions the legality of the view held by amendment proponents and the Massachusetts Department of Revenue that the amendment should be interpreted as applying to income from short-term and long-term capital gains. That said, the new study presents an analysis based on DOR’s initial interpretation that the surtax would indeed apply to capital gains.

The new study also demonstrates a correlation between the top marginal tax rate on capital gains and the average value of those gains among millionaires at the state level. Most of the states where average capital gains among the wealthy are the highest have no personal income taxes at all, including Wyoming, Nevada, and Florida. Meanwhile, some of the states with the most prominent financial services sectors in the country, such as New York, California, and New Jersey, have lower capital gains averages and much higher tax rates.

In 2014, the Tax Foundation found that, at 28.1 percent, Massachusetts had a lower combined state and federal capital gains tax rate than the national average of 28.7 percent. However, only California taxes short-term capital gains, such as those from day trading, at a higher rate than Massachusetts.

The graduated income tax proposal would give Massachusetts a short-term capital gains tax rate of 16 percent, far above California’s 13.3 percent. On long-term capital gains, Massachusetts would have a tax rate of 9 percent, higher than that of each of its neighboring states, including New York.

“It’s an obvious point that promoters of the surtax cannot respond to: such sky-high taxes on capital gains will lower the level of investment activity in the state. Why that matters is that over the past several decades, Cambridge, South Boston, and other areas have enjoyed a remarkable economic renaissance driven by innovative firms,” said Pioneer Institute Executive Director Jim Stergios. “Our innovation clusters rely heavily on Boston’s strong investment industry. If we put the investment industry at a disadvantage, we will weaken our innovation clusters, the demand for products and services from industries that do business with our innovation clusters, and ultimately job creation.”

The number of jobs in the financial services sector itself is also significant. In Massachusetts, over 191,000 people worked in either finance or insurance in 2019, and 77 percent of those jobs were in Greater Boston.

About the Authors

Gregory Sullivan is Pioneer’s Research Director. Prior to joining Pioneer, Sullivan served two five-year terms 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.

Andrew Mikula is Economic Research Analyst at Pioneer Institute. Mr. Mikula was previously a Lovett & Ruth Peters Economic Opportunity Fellow at Pioneer Institute and studied economics at Bates College.

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

Larry O’Toole on Workplace Culture & Immigration Policy

On this week's episode of JobMakers, host Denzil Mohammed talks to Larry O’Toole, founder of the multi-state Gentle Giant Moving Company that started in 1980 right here in the Boston area. They discuss Mr. O'Toole's journey at a young age from Ireland to Brookline, Mass., the challenges of being uprooted, and the ability to thrive despite barriers such as skills gaps, that many immigrants face.

Fair Share Amendment: Weighing Costs & Benefits for Massachusetts’ Economy & Workers

Hubwonk host Joe Selvaggi talks with Pioneer Institute’s Executive Director Jim Stergios about HB86, the so-called Fair Share Amendment, to tax Massachusetts household income above $1 million. They discuss its promises, its costs, and the effects of similar legislation in other states.

Amar Sawhney on Sikhs, STEM & COVID

On this week's episode of JobMakers, host Denzil Mohammed talks to Dr. Amar Sawhney about his journey from India to Boston, and how he is using his chemical engineering background to save lives through remarkable local therapy innovations. To date, he has founded eight companies accounting for 4,000 jobs and more than $2 billion in revenue.

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.

Max Faingezicht on the Skills Gap & the Future of Work

This week on JobMakers, host Denzil Mohammed talks with Max Faingezicht, an immigrant who founded ThriveHive, a marketing software company for small businesses, and Telescoped, which uses remote software engineering to connect Latin American engineers with U.S. companies in need of their skills. The entrepreneurial ecosystem of Boston and Cambridge have allowed Max to achieve dreams he didn’t even know he had when he arrived. In this episode, he shares his fascinating immigration story, as well as his ideas on where workers go next.

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.

Hilda Torres Makes the Grade

This week on JobMakers, host Denzil Mohammed talks with Hilda Torres, an immigrant from Mexico who runs My Little Best Friends Early Learning Center in Malden, Massachusetts. One of the most successful businesses in the city, the center enrolls over 100 students whose parents come from more than 25 different countries. In this episode, Hilda shares how she used the tools of education, and her own grit and determination, to make her mark in the land of opportunity.

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.

Hong Tran Goes from Refugee to Realtor

This week on JobMakers, host Denzil Mohammed talks with Hong Tran, a Worcester, Massachusetts-based realtor and small business owner who emigrated to America as an orphaned refugee from Vietnam.

Sandro Catanzaro Takes His American Dream to Mars and Back

This week on JobMakers, host Denzil Mohammed talks with Sandro Catanzaro, who started several businesses in his native Peru but had no idea he’d end up helping NASA go to Mars, or that he’d use that same technology to plan and buy video ad campaigns. Now Head of Publisher Services Strategy for Roku, which acquired the company he founded, dataxu, in 2019, Mr. Catanzaro is an emblem of ingenuity and inventiveness. His demand-side platform, device graph technology and analytics platform help accelerate Roku’s ad tech roadmap and ability to serve a wide array of advertisers. But he’s not done yet!

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.