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

Study: Tax Up For A Vote In November Would Ensnare Over Three Times More Taxpayers Than Previously Estimated

Analyses from the Massachusetts Department of Revenue (MADOR, 2016) and Tufts University’s Center for State Policy Analysis (2022) dramatically underestimated the number of households and businesses impacted by the constitutionally-imposed tax hike that the legislature is putting before voters in November 2022, according to a new study from Pioneer Institute.

David Keane On How Taking Risks On Immigrants Pays Off

This week on JobMakers, host Denzil Mohammed talks with David Keane, immigrant from Australia and founder of Bigtincan, an artificial-intelligence-powered sales enablement platform for leading companies worldwide. David believes that what makes the U.S. special is its culture both of welcoming immigrants and being willing to try new things, to take risks.

Johan Norberg on How Diversity Drives Progress

This week on JobMakers, host Denzil Mohammed talks with Johan Norberg, senior fellow at the Cato Institute and author of Open: The Story of Human Progress. They discuss the many ways in which America is better off because it has been open to the exchange of ideas and skills that created cures, machinery, and technology.

Jeff Farrah on Why We Need a Start-Up Visa

This week on JobMakers, host Denzil Mohammed talks with Jeff Farrah, General Counsel at the National Venture Capital Association, a D.C.-based group that advocates for public policy supportive of American entrepreneurship.

Carlos Castro: From Crossing the Border to Owning a Business

This week on JobMakers, host Denzil Mohammed talks with Carlos Castro, president and CEO of Todos Supermarket in Woodbridge, Virginia, a successful business employing more than 200 people. He describes the perilous conditions in his native El Salvador, why he crossed the border to America, and why immigrant business owners tend to hire people like them, in this week’s JobMakers.

Alex Nowrasteh on How Immigration Is a Boon to the U.S.

This week on JobMakers, host Denzil Mohammed talks with Alex Nowrasteh, the Cato Institute’s director of immigration studies and author of “The Most Common Arguments Against Immigration and Why They’re Wrong.” This week, Alex hones in on a fact that research has consistently found: that immigrants benefit Americans. And, based on his many years of speaking on this topic to anti-immigrant audiences, he provides insight on where anti-immigrant arguments really come from, as you’ll find out in this week’s JobMakers.

Public Statement on Massachusetts High Technology Council’s Challenge to the Graduated Income Tax Ballot Language

The Massachusetts High Technology Council is right to insist on transparency in the language of a tax hike amendment scheduled to appear on the Massachusetts state ballot next year.

Alex Nowrasteh on What We Get Wrong About Immigrants

This week on JobMakers, host Denzil Mohammed talks with Alex Nowrasteh, the Cato Institute’s director of immigration studies and author of “The Most Common Arguments Against Immigration and Why They’re Wrong.” This is the first of a two-part conversation, and some of what you’re about to hear might surprise you. Alex knows that. But getting truth and facts out there is paramount in advancing sensible policies that benefit all Americans, new or old, as you’ll discover in this week's JobMakers.

Study: “Millionaire’s Tax” Would Have Far-Reaching Effects on “Pass-Through” Businesses

A proposed graduated income tax that will appear on the statewide ballot in November 2022 will have much more far-reaching implications than most people realize because the surtax also extends to “pass-through” income from entities such as S and limited liability corporations, partnerships, and sole proprietorships that are taxed on individual tax returns, according to a new study published by Pioneer Institute.

Larry Kim’s One-Way Ticket to the American Dream

This week on JobMakers, host Denzil Mohammed talks with Larry Kim, founder of WordStream in Boston, which was acquired for $150 million, and MobileMonkey, a chatbot marketing platform for marketing and customer support on Facebook Messenger, web chat and SMS.

Mayor Christenson on How Immigrants Enrich His City

This week on JobMakers, host Denzil Mohammed talks with Gary Christenson, Mayor of Malden, the second most diverse city in Massachusetts, with almost 43 percent of its residents born outside of the United States. It’s also home to The Immigrant Learning Center, the co-producer of this podcast. It’s always been a gateway city for immigrants and refugees, and it is this diversity that gives Malden its strength. Mayor Christenson looks to the revitalization of downtown with its disproportionate number of immigrant-owned businesses, and talks with us about managing the relationships between long-time residents and new immigrants, the reaction of the city to hate crimes after the Boston Marathon bombing, how much immigrants have given back to their new home, and his stance on sanctuary cities, in this week’s JobMakers.

Supply Chains Understood: Covid’s Global Demand Stress Test

https://www.podtrac.com/pts/redirect.mp3/chtbl.com/track/G45992/feeds.soundcloud.com/stream/1148317750-pioneerinstitute-hubwonk-ep-78-supply-chains-understood-covids-global-demand-stress-test.mp3 This…