Study: Graduated Income Tax Proposal Fails to Protect Taxpayers from Bracket Creep

Share on Facebook
Share on Twitter
Share on
LinkedIn
+

BOSTON – 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.

If Massachusetts incomes and prices continue to grow at their current rates, households currently earning $700,000 a year would be subject to the surtax by 2038, and those currently earning $600,000 would be subject to it by 2044. This amounts to punishing future wage gains among a demographic that is not acknowledged as a target for the tax hike.

“Whether willfully or not, the proponents insisted on an escalation factor that will be punitive to many more Massachusetts taxpayers than is part of their pitch,” said Greg Sullivan, who co-authored “The Great Mismatch: The graduated income tax proposal’s gravely flawed escalation factor,” with Andrew Mikula. “If the measure had been tied to the median household income, it would have better protected taxpayers from bracket creep. It would also have ensured that income, the commodity being taxed, was the sole basis for the adjustments. If we’re levying a tax on income, we should index the escalation factor to income.”

Cost-of-living adjustments in the graduated income tax proposal are tied to the chained Consumer Price Index (CPI) among all urban consumers, as calculated by the federal Bureau of Labor Statistics. While the CPI is also used as an escalation factor at the federal level, Congress frequently adjusts tax rates and brackets to meet the needs of the times. By contrast, Massachusetts’ proposed surtax would lock the CPI escalation method into the state constitution, making it very difficult to adjust as needed.

To illustrate the discrepancy between growth of the CPI and wage growth, the study contrasts what state legislators’ wage gains would have been between 2017 and 2021 if they were tied to the CPI (6.42 percent) with the actual growth rate (12.77 percent), which uses an income-based index. It also shows that from 2014 to 2019, when the state’s economy was at peak health, mean household income among the wealthy rose nearly five times faster than the CPI — 35.7 percent vs. 7.5 percent.

In the long term, the difference between cost-of-living increases and wage increases is less stark. However, the report also shows that between 1989 and 2019, wage growth exceeded the cost of living growth rate for every income quintile in the state.

Since 1999, the year the chained CPI was introduced, aggregate wages and salaries in Massachusetts have more than doubled, while the CPI has grown by 44.3 percent. That means wages and salaries have grown at more than twice the rate of CPI.

“We are debating the merits of a constitutional amendment,” said Pioneer Institute Executive Director Jim Stergios, “and this study adds to the long list of ways in which the proposal has not been vetted for its long-term implications.”

Growth in the CPI has been especially slow in recent years, with the twin crises of the Great Recession and COVID-19 pandemic leading to weak demand. In the coming decades, the continued disparity between rising wages and rising prices could push many Massachusetts residents into a higher tax bracket.

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.

Get Updates on Our Economic Opportunity Research

Related Content

Trump Administration, Congress Offer Vastly Different Visions for the Future of the Housing Choice Voucher Program

This edition of The House Call explores a federal proposal to cut Housing and Urban Development funding by 44 percent, and how it contrasts with a more recent congressional appropriations bill. The newsletter also provides an update on compliance with Massachusetts' multifamily zoning mandate around MBTA stations after the latest deadline.

Study Finds MBTA Operating Costs Surging Since Control Board’s Elimination

In the years since fiscal 2018, when the MBTA last balanced its budget without state contract assistance or federal funds, operating costs have been rising at an alarming rate, culminating in an increase of nearly 15 percent from FY 2023 to FY 2024 alone, according to a new policy brief published by Pioneer Institute.

New Report Shows Massachusetts Has Been in Economic Slow Down Since 2020

A new report from Pioneer Institute shows that Massachusetts has been in an economic slowdown since 2020, with the professional, scientific, and technical services sector (PSTS) exhibiting the greatest slowdown relative to competitor states since 2022. This sector includes scientific research and development, computer systems design, engineering, and scientific consulting firms. 

Connecticut’s H.B. 5002: A Stark Contrast With Massachusetts’ Approach to Housing Reform

This edition of The House Call discusses a pending bill in Connecticut that both requires municipalities to plan for more affordable housing and preempts local zoning rules on small multi-family buildings and parking requirements. The newsletter also explores the possible effects of banning landlords from imposing "broker's fees" on residential tenants.

New Study Cautions: Rent Control Offers Short-Term Relief, But Steep Long-Term Costs

A new Pioneer Institute study finds that while rent control can lower rental housing costs and help vulnerable tenants remain in their homes, it also carries steep long-term consequences—including reduced housing quality, lower property values, fewer new housing units, and higher rents for non-controlled apartments. 

New Report Warns: Massachusetts Facing Alarming Decline in Private Sector Employment Growth

While nearly every state has expanded private sector employment since the onset of the COVID-19 pandemic, Massachusetts is an outlier in experiencing a net decline in private sector job growth, posing significant risks to the state’s economic health and long-term prosperity, according to a new policy brief published by Pioneer Institute. 

Massachusetts Releases New Permanent Regulations for MBTA Communities Act

The April edition of The House Call provides an update regarding the MBTA Communities Act's implementation, with some communities amending their zoning via either referendum votes or Town Meeting this spring. The newsletter also includes a discussion of communities that have eliminated minimum parking requirements in recent years.

Historical Domestic Migration Patterns: Putting Massachusetts in Context

This week's edition of Mapping Mass Migration features an analysis of newly released data from the Census Bureau, its March supplement of the Current Population Survey. Our analysis covers how migration trends have played out nationally since 1948, including the demographics of movers, the extent of their migration (within a county, across counties, to another state, etc.), and the most common reasons movers cite for changing their primary residence. The newsletter concludes with a brief discussion of what might account for a decline in overall migration rates nationally and where Massachusetts fits in.

The House Call – Cambridge Adopts a Zoning Ordinance Allowing 4 to 6-Story Residential Buildings Citywide

The March edition of The House Call covers recent zoning changes in Cambridge that allow 4 to 6-story buildings on every residential lot. It also summarizes reform recommendations from a state commission tasked with advising the Healey administration on how to ramp up housing production.

Study: Inclusionary Zoning Helps Some, but Can Jeopardize Broad-Based Affordability

Policies often force developers to raise market-rate prices to compensate for losses on affordable units

Pioneer Institute Study Says MA Housing Permitting Process Needs Systemic Reform

Highlights Bureaucratic licensing process and appeals as areas to fix