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 past seven weeks of Massachusetts unemployment claims total 25.8 percent of the civilian workforce.

0 Comments
/
The U.S. Department of Labor released its weekly report on jobless claims Thursday morning at 8:30 a.m., reporting that Massachusetts received 55,448 initial unemployment insurance (UI) claims during the week ended May 2. This brings the total of regular UI claims filed in Massachusetts since March 14, the beginning of the unemployment surge, to 781,110. 

COVID-19 will likely lead to a recession. Can Massachusetts municipal budgets handle one?

0 Comments
/
Using municipalities' experiences during the Great Recession, a new policy brief examines the likely impact of COVID-19 on local property taxes, as well as political implications for state aid. We list the municipal revenues by category among the least tax-reliant communities in Massachusetts, show the trajectory of tax revenue growth rate in Massachusetts state and local governments, and rank stabilization fund assets per capita among Massachusetts Gateway Cities.

The past six weeks of Massachusetts unemployment claims total 24.0 percent of civilian workforce

0 Comments
/
The U.S. Department of Labor released its weekly report on jobless claims this morning at 8:30 a.m., reporting that Massachusetts received 70,714 initial unemployment insurance (UI) claims during the week ended April 25. This brings the total of unemployment claims filed in Massachusetts since March 14, the beginning of the unemployment surge, to 725,018. 

Report Finds “Reopening Day” in the Commonwealth Will Likely Include Phasing in Businesses and Contact Tracing

New study compares the reopening of three European countries – Austria, Denmark, and Germany – to highlight approaches that could inform the Commonwealth’s reopening strategy.

New jobless claims data shows that Massachusetts unemployment has grown from 2.8% to at least 20.4% in five weeks

0 Comments
/
Based on today’s jobless claims report, Pioneer Institute projects that the current unemployment rate in Massachusetts is at least 20.4 percent, with a minimum of 762,299 currently unemployed individuals.

Hospitality, Retail Trade, Healthcare Among ‘Most Vulnerable Industries’ in Terms of Unemployment due to COVID-19

Recent data provided by the Massachusetts Executive Office of Labor and Workforce Development show that hospitality, retail trade, healthcare and social assistance, and construction are the industries that have suffered the most unemployment as a result of the coronavirus outbreak, according to the new Pioneer Institute report, “A Look at the Massachusetts Industries that are Most Vulnerable Due to COVID-19.”

Which industry’s workforce has been hurt the most from the COVID-19 outbreak?

0 Comments
/
Unemployment claims have reached all-time highs in the U.S. recently…

State Ranking: Michigan, Hawaii, Rhode Island, Pennsylvania, and Nevada have been hardest-hit by COVID-19 jobless claims so far. Massachusetts ranks as 9th hardest-hit.

0 Comments
/
The U.S. Department of Labor reported today that in the week ended April 4, the advance number of seasonally-adjusted initial jobless claims was 6,606,000. This follows 6,867,000 initial claims filed in the week ended March 28 and 3,307,000 in the week ended March 21.

Report: MA Likely to See Sharp Spike in Unemployment Rate

The COVID-19 recession could cause Massachusetts’ unemployment rate to skyrocket to 25.4 percent by this June, according to a new policy brief published by Pioneer Institute. The authors recommend that the state join others in lobbying Congress for large block grants to avoid a severe fiscal crisis.

Pioneer Launches Report Series Highlighting Massachusetts Job Growth and Business Trends Since 1998

In “Some Big, Broad Economic Trends in Massachusetts,” Pioneer analysis of two decades of data shows fluctuating employment changes across the state, as well as firm size information and the largest employers. The report is part one of aa series that aims to provide deeper insight into COVID-19's economic impact.

COVID-19 Roundup from Pioneer: When will COVID-19 peak in MA?; Life in the aftermath; Tracking potential treatments; Getting America working again; Taking virtual learning to new heights & more!

0 Comments
/
Pioneer staff (and readers) share their top picks for COVID-19 stories highlighting useful resources, best practices, and questions we should be asking our public and private sector leaders.

New Policy Brief on Federal Relief Act’s Impact on Massachusetts

0 Comments
/
Greg Sullivan and Charlie Chieppo review the impact of the Coronavirus Aid, Relief, and Economic Security Act on Massachusetts' budget.