Editorial Staff

Study Says Massachusetts Surtax Proposal Could Reduce Taxable Income in the State by Over $2 Billion

/in , , , /by Editorial Staff
Share on Facebook
Share on Twitter
Share on
LinkedIn
+

BOSTON – As Massachusetts voters now begin to weigh the potential impact of a ballot proposal to increase taxes on business owners, retirees and wealthier households, a new literature review by Pioneer Institute shows that many existing academic studies find that wealthy individuals are particularly sensitive to changes in tax policy. Other studies explicitly warn policymakers that behavioral responses to taxing the rich could erode the tax base and ultimately strain state budgets.

Many of the individual research papers described in the report focus on particular sub-groups of the wealthy, such as chief executive officers at major corporations and particularly innovative “star scientists.”

“The breadth of research covered in this paper really highlights the variety of ways in which income tax hikes can leave states vulnerable to wealth flight and fiscal and economic harm,” said Andrew Mikula, author of Tax Flight of the Wealthy: An Academic Literature Review. “Besides physical relocation out of Massachusetts, such policies are also deterring innovators from coming here to begin with, and encouraging stock-based salaries that are used to delay tax payments.”

The Pioneer Institute study ties the results of these academic pieces into Massachusetts’ current graduated income tax proposal. For example, a 2012 study from the University of Pennsylvania found that, for every 1 percent increase in the share of income retained after taxes, the total value of taxable income in a jurisdiction increases by between 0.12 percent and 0.40 percent in the long run. This would imply that Massachusetts’ proposed surtax would decrease the amount of taxable income in the state by between $606 million and $2.02 billion.

A 2008 study in the Journal of Urban Economics spoke to the interaction between the proposed surtax and a pending court case between New Hampshire and Massachusetts over whether remote workers in the Granite State are obligated to pay taxes in Massachusetts when their companies are based here. The study found that, in states without “reciprocity agreements” that would prevent such disputes, the impact of tax hikes on migration patterns is far stronger.

Pioneer’s new policy brief also highlights nuances in past studies that have downplayed the role of tax hikes in the migration decisions of the wealthy. For example, a 2016 paper by Cornell University Professor Cristobal Young claims that “when Florida is excluded, there is virtually no” correlation between income tax rates and migration patterns in the United States.

However, underpinning this headline-worthy line is that Young doesn’t rule out that there is an “especially appealing combination” of tax avoidance and geography driving the so-called Florida effect. In addition, the database used in Young’s paper only includes households that earned over $1 million in the year before they move, a severe limitation that misses households that migrate for the purpose of avoiding taxes on the anticipated sale of a valuable asset.

Other papers described in the report discuss the tax policy implications of the Tiebout hypothesis that people tend to “vote with their feet.” In the aftermath of the COVID-19 pandemic, taxpayers may be especially mobile as they are able to work from home in greater numbers than ever before. All but one of the papers described in the report predate the pandemic, and most of them predate the Tax Cuts and Jobs Act as well, whose limitation on the state and local tax deduction could also encourage increased migration among the wealthy.

“Research data allow us to put some hard numbers on the devastating and perhaps permanent impact of a graduated income tax – as much as $2 billion in lost taxable income,” said Pioneer Institute Executive Director Jim Stergios. “And calculating the impact on state tax revenues ignores the enormous human toll: lost jobs and less security for homeowners. The long-term effects may include, as is abundantly clear in the case of Connecticut, anemic growth in state tax receipts and therefore fewer resources for social programs and public investments.”

About the Author

Andrew Mikula is an 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.

About Pioneer

Pioneer’s mission is to develop and communicate dynamic ideas that advance prosperity and a vibrant civic life in Massachusetts and beyond.

Pioneer’s vision of success is a state and nation where our people can prosper and our society thrive because we enjoy world-class options in education, healthcare, transportation and economic opportunity, and where our government is limited, accountable and transparent.

Pioneer values an America where our citizenry is well-educated and willing to test our beliefs based on facts and the free exchange of ideas, and committed to liberty, personal responsibility, and free enterprise.

Get Updates on Our Economic Opportunity Research

Related Posts:

Book Reveals How Tax Hike Amendment Would Damage Commonwealth’s Economic Competitiveness

If adopted, a constitutional amendment to hike state taxes that will appear on the ballot in November could erase the hard-earned progress Massachusetts has achieved toward economic competitiveness over the last 25 years and may not result in any additional education and transportation funding, according to a new book from Pioneer Institute, entitled Back to Taxachusetts?: How the proposed tax amendment would upend one of the nation’s best economies, which is a distillation of two dozen academic studies.

Study Documents The Design Challenges, Contracting Issues, And Delays Facing New MBTA Fare Collection System

This new study unearths previously unseen communications between the MBTA and its contractors, showing that the MBTA’s efforts to modernize its fare collection system, including allowing payments with credit cards and bringing “tap and go” technology to Commuter Rail and ferry lines, was riddled with technological challenges and difficulties overseeing contractors as early as 2019, culminating in a 3-year delay to the project’s full implementation.

Study: Legislature Likely to Reduce Spending on Education and Transportation from Other Revenue Sources, Replace Cuts with Surtax Money

Revenue from a ballot initiative to amend the state Constitution and raise income taxes on households and businesses by adopting a graduated income tax structure would supposedly provide resources for transportation and public education, but a new study published by Pioneer Institute finds that, were the tax amendment to pass, the money would be fungible and much of it likely spent on general budget measures.   

Study Finds Bus Rapid Transit Can Offer Cost-Effective Benefits

Bus rapid transit (BRT) incorporates unique features such as dedicated lanes to provide reliable and cost-effective service while reducing congestion and its detrimental environmental impacts, according to a new study published by Pioneer Institute.

Pioneer Supports Legal Challenge to Misleading Tax Ballot Language, Releases Video

Pioneer Institute supports the diverse and bipartisan group that filed a complaint with the Massachusetts Supreme Judicial Court (SJC) challenging the summary language meant to provide an accurate description of the tax hike amendment to voters. The language was approved by the Attorney General and Secretary of the Commonwealth when a similar amendment was proposed in 2018, and unless the lawsuit is successful, will likely appear on the Massachusetts ballot in November.

Study Raises Concern That Annual T Fare Evasion Costs Could Rise By More Than $30 Million Under AFC 2.0

According to the Federal Transit Administration (FTA), the MBTA’s $935.4 million fare collection system (AFC 2.0) that is scheduled to be implemented in 2023 will reduce fare evasion by $35 million over a decade. But the T announced in 2021 that evasion could actually increase by up to $30 million under AFC 2.0, and now a Pioneer Institute study warns that insufficient fare enforcement could drive that figure even higher under the new system.

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.

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.

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.
Welcome to New Hampshire Sign: Live Free or Die

Study Warns that New Hampshire Tax Policies Would Exacerbate Impacts of a Graduated Income Tax

Drawing on migration patterns between Massachusetts and states like Rhode Island and Tennessee, Pioneer Institute is releasing a study showing a direct correlation between personal income tax rates and household domestic migration patterns between 2004 and 2019. The study suggests that instituting a graduated income tax will shrink the tax base and deter talented workers and innovative employers from coming to and staying in the Bay State.