This op-ed appeared in The Boston Business Journal on February 7, 2018
It all sounds so simple. Just slap a four-percentage-point surcharge on all annual income over $1 million and use the supposed $1.9 billion windfall to fund education and transportation. It sounds irresistible … until you look at the results just to our south in Connecticut, where the same policies have essentially been in place for years.
Over the last quarter-century, Connecticut has endured a series of budget crises. To cover ballooning costs, the state enacted sharp tax hikes, including four income tax hikes in the last 14 years that caused the top rate to jump by 77 percent. In recent years, Connecticut has increasingly turned to high earners and large companies to close budget gaps, doubling a surcharge on large firms, establishing and then increasing a tax on luxury goods, and yes, raising the income tax for the state’s highest earners.
The results have been disastrous. From 2007 to 2016, the state placed 49th among the states and D.C. in private-sector wage growth. According to the American Legislative Exchange Council, only one state economy performed worse than Connecticut’s between 2005 and 2015.
What about all that extra revenue? Well, according to a 2014 Connecticut Department of Revenue study, the state’s 357 wealthiest families account for 11.7 percent of all income tax revenue. Between 2011-12 and 2014-15, Connecticut lost high earners at a rate that trailed only Washington, D.C., and those who fled earned more on average than high earners leaving other states. The result was that despite rate increases, the amount of taxes paid by Connecticut’s 100 top taxpayers plummeted 45 percent between 2015 and 2016 alone. As we in Massachusetts well know, General Electric and Alexion Pharmaceuticals decided to jump ship and move their headquarters here, while Aetna Insurance has announced plans to move to New York.
Connecticut has been highly successful in one area: Increasing the burden on state taxpayers. “Tax Freedom Day” — the date by which workers earn enough to pay their annual taxes — didn’t arrive until May 21 this year, the latest of any state in the country.
In the wake of the 1990-91 recession, Massachusetts took a very different approach than Connecticut. A state income tax that was once 6.25 percent now stands at 5.1 percent.
Since the end of that recession, the commonwealth has attracted millionaires at more than twice the rate of Connecticut. Since February 2010, Massachusetts has created more than three times the number of jobs it lost during the Great Recession. In contrast, Connecticut still hasn’t recovered all the jobs it lost — and the jobs it has created are, on average, lower paying.
Like Connecticut, Massachusetts relies on a relatively small number of wealthy taxpayers to foot the commonwealth’s bills. If a third of those impacted by Proposition 80 decided to move, it would result in a loss of $750 million in annual tax revenue.
And “leaving” has never been easier. In some cases, high earners can stay put and simply move money into trusts located in other states.
The narrative of reaping revenue from those who won’t even miss it and using it to fund education and transportation needs is indeed seductive. But a look at the best case study we have about what its actual impacts might be is far more sobering.
Greg Sullivan is research director at Pioneer Institute, a Boston-based think tank.