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

Commentary On The Senate Ways And Means Committee FY2025 Budget 

The Senate Ways and Means Committee (SWM) released its FY2025 budget on May 7th.  This spending plan totals $57.9 billion, an increase of $1.8 billion over the FY2024 General Appropriations Act (GAA).  Like the Governor’s and House’s versions of the budget, the SWM budget is based on the consensus revenue estimate of $41.5 billion in tax revenue - a decrease of $208 million from last year’s consensus figure.

Pioneer Statement on Continuing Slide in Massachusetts’ Revenue

The Commonwealth’s tax collections continue to slide, totaling $3.594 billion in January, $268 million below what the state collected in January 2023, and short of the revised benchmark by $263 million. Massachusetts state government must live within its means by reducing FY2025 spending. The days of fiscal surpluses, unprecedented increases in year-over-year spending, and flowing federal aid have come to an end.

Pioneer Statement on Decline in State Revenues

The Commonwealth’s finances have stumbled hard in recent months, and based on a report the Department of Revenue (DOR) sent to the Legislature in January, the trend shows no signs of easing. Massachusetts needs a renewed emphasis on fiscal discipline and pro-growth policies to make the state economically competitive again.

Skill-based immigration could ease labor shortage

A recent Biden administration executive order that amends the Schedule A list, which identifies occupations experiencing labor shortages and allows immigrants in those occupations to expedite their employment in the U.S., could positively impact the hiring of skilled international workers for years to come — a welcome development as the country and Massachusetts struggle to attract talent amidst a worsening labor shortage.

My Musings on Massachusetts’ Fiscal Picture

Since the start of FY2024 on July 1, 2023, the state has experienced six straight months of revenues falling short of expectations. The single biggest factor is the unprecedented growth of the state budget since FY2021. The $15 billion increase in state spending contextualizes the seemingly modest projected revenue growth of 1.6 percent for FY2024 by highlighting that the base is very inflated.

The Massachusetts Workforce: Abundant Resources, Steep Challenges

Massachusetts features a strong workforce training system with abundant resources yet faces challenges in matching jobs and applicants, training youth, and attracting sufficient numbers of skilled immigrants, according to a pair of studies from Pioneer Institute.

Statement on Massachusetts Falling from 34th to 46th on Tax Foundation’s 2024 Business Tax Climate Index

Massachusetts policymakers should pay close attention to the latest evidence of the Commonwealth’s declining competitiveness. Last week, the Tax Foundation published its 2024 State Business Tax Climate Index, which showed Massachusetts’ ranking falling more than any other state, from 34th to 46th.

Pioneer Institute Statement on the State Legislature’s FY2024 Tax Relief Package

The recent advancement of a tax bill H. 4104, that is expected to be enacted by the Legislature this week after languishing for more than 20 months, puts Massachusetts taxpayers one step closer to realizing some tax relief. However, it may be too little to tackle the Commonwealth’s affordability and competitiveness challenges.

Poll: MA Voters Oppose Legislative Proposals to Change Tax Rebate Law

A strong majority of registered Massachusetts voters oppose a plan recently announced by state legislative leaders that would change the way tax rebates are distributed in Massachusetts under a state law approved by voters in 1986, according to a new poll sponsored by Pioneer Institute and the Massachusetts High Technology Council.

A Tale of Two Massachusetts: Wealth and Labor Differences Between East and West

This blog compares the income, wealth, and property values of western Massachusetts to those of eastern Massachusetts, highlighting the west's potential for growth.

Senate Tax Package Misses the Mark on Competitiveness

The Senate tax package, S.2397, is heavy on provisions that reduce the tax burden for certain taxpayers, thereby helping those that qualify for the expanded credits and deductions. The bill, however, is light on provisions that will improve the Commonwealth’s competitiveness.

Installing bike and bus lanes requires public debate

The problem isn’t with the concept of bike lanes but, rather, the lack of public conversation or transparency. Municipal governments are changing the infrastructure and character of entire neighborhoods and small commercial centers with little input from those most affected.