Editorial Staff

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

/in , , , , /by Editorial Staff
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

Zoning Reform Revisited: Local Control Determines How, Not If, Housing Gets Built

Hubwonk host Joe Selvaggi talks with Pioneer research associate Andrew Mikula about the need for affordable housing near the mass transit network and the requirements and local design opportunities of the 3A zoning reform law. Read Pioneer Institute's recent public comment on this topic.

Evan Silverio Builds Upon Immigrant Mother’s Business Success

This week on JobMakers, host Denzil Mohammed talks with Evan Silverio, child of immigrants from the Dominican Republic, President and CEO of Silverio Insurance Agency, and founder of Diverse Real Estate, both in Lawrence, Massachusetts.

Abul Islam Helps Rebuild America’s Infrastructure

This week on JobMakers, host Denzil Mohammed talks with Abul Islam, immigrant from Pakistan and founder, President and CEO of AI Engineers. AI Engineers is a Connecticut-based consulting firm that builds and rehabilitates bridges, transportation systems and building systems throughout the U.S. Since 1991, Abul has created nearly 1,000 jobs and today leads a $50 million company. 

Roger Magalhaes Goes from Truck Driver to Industry Leader

This week on JobMakers, host Denzil Mohammed talks with Roger Magalhaes, immigrant from Brazil and founder of the firms Shades in Place window treatment installation and Trading Up Consulting, in Franklin, Massachusetts.

Rent Control Redux: Mayor’s Committee Likely to Provide Astroturf Over Expertise

Hubwonk host Joe Selvaggi talks with Doug Quatrocchi, executive director of Masslandlords.net about the historical effects of rent control in Boston and Cambridge in the past and discuss the gap between the stated goals and the likely outcome of Boston Mayor Wu’s 25 member Rent Stabilization Advisory Committee.

Avak Kahvejian on How Immigrants Drive Innovation

This week on JobMakers, host Denzil Mohammed talks with Dr. Avak Kahvejian, an inventor, entrepreneur and CEO as well as general partner at Flagship Pioneering, a life sciences venture capital company in Cambridge, Massachusetts.

Dr. Celina Miranda on Immigrant Entrepreneurs & Community Uplift

This week on JobMakers, host Denzil Mohammed talks with Dr. Celina Miranda, executive director of the Hyde Square Task Force in Jamaica Plain’s Latin Quarter, today one of the most diverse neighborhoods in Massachusetts.

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.   

Theresa Park on How Immigrants Revitalize U.S. Cities

This week on JobMakers, host Denzil Mohammed talks with Theresa Park, Deputy Director and Senior Executive Vice President at MassDevelopment, a group that offers financing and real estate solutions to drive economic growth across Massachusetts. An immigrant from Korea who moved to Lawrence, Massachusetts, Theresa saw first-hand how immigrants built their lives from the ground up, and in so doing brought economic and cultural vibrancy to their new home cities.

Reinier Moquete on the Audacity of Immigrant Entrepreneurship

This week on JobMakers, host Denzil Mohammed talks with Reinier Moquete, son of immigrants from the Dominican Republic and founder of CyberWarrior, a cyber security services provider in Boston, Massachusetts.

Dinesh Wadhwani Clears the Air with Light Technology

This week on JobMakers, host Denzil Mohammed talks with Dinesh Wadhwani, founder and CEO of ThinkLite, LLC in Natick, Massachusetts, and immigrant from Ghana.

Transit Innovation Explored: A Bus As Fast As A Train?

Hubwonk host Joe Selvaggi talks with transportation expert Ian Ollis about the findings of his new research paper, "Bus Rapid Transit: Costs and Benefits of a Transit Alternative," which examines the benefits of building Bus Rapid Transit to serve communities looking for faster transit alternatives to a car.