Editorial Staff

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

/in , , , /by Editorial Staff
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

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.

Study: Immigrant Entrepreneurs Benefit N.E. Economy, Despite Facing Obstacles to Growth

BOSTON – Immigrants in Massachusetts and New England are more likely to be self-employed, but the businesses they own tend to be in different industries than those owned by the U.S. born, according to a new study published by Pioneer Institute.
Image by Freepik

A Model for Occupational Licensing Reform in the Bay State

Licensing for many professions squeezes the supply of services, artificially inflating prices and creating wage premiums. One study from the Institute for Justice put the wage premium relative to an environment without any occupational licensing at a whopping 22 percent in Massachusetts.

Study Finds Massachusetts Workforce Has Become More Female, Older, More Diverse

The Massachusetts labor force has transformed in recent decades, with some of the biggest changes being the advancement of women, workers getting older and more diverse, and a divergence in labor force participation rates based on levels of educational achievement, according to “At a Glance: The Massachusetts Labor Force,” a white paper written by Pioneer's Economic Research Associate Aidan Enright.

New IRS Data Shows Out-Migration Worsening, Underscoring the Need for Massachusetts Leaders to Focus on State’s Competitiveness

Massachusetts’ net loss of adjusted gross income (AGI) to other states grew from $2.5 billion in 2020 to $4.3 billion in 2021, according to recently released IRS data. Over 67 percent of the loss was to Florida and New Hampshire, both states with no income tax.

Public Statement on the House’s Proposed Tax Reform and Budget

Pioneer Institute applauds key tax reform provisions advanced by the Speaker and House leadership, including a reduced short-term capital gains tax rate and implementation of a single sales factor apportionment. But leadership must do more to bolster the state’s economic competitiveness and slow out-migration of wealth and business owners that endangers the commonwealth’s economic future.

Debunking Tax Migration Myths

Provisions of Gov. Healey’s $876 million tax package targeted to higher-income earners — including revisions to the estate tax and a reduction in the tax rate for short-term capital gains — are important for encouraging taxpayers subject to them to remain in Massachusetts, according to a new analysis from Pioneer Institute.