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

Share on Facebook
Share on Twitter
Share on
LinkedIn
+

S corporations, LLCs, partnerships would see hefty tax hikes if proposed constitutional amendment is adopted

BOSTON – 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.

The U.S. Census Bureau found that these entities account for about 70 percent of for-profit business entities in Massachusetts and nearly half all those employed by for-profit businesses.

“This tax hike would come on top of other taxes that only apply to these entities,” said Greg Sullivan, author of “The Far-Reaching Impact of a Massachusetts Surtax: Anecdotal Evidence and Data Analysis.”  “The result is that these mostly small businesses would not only pay taxes at a higher rate than large corporations, but see their taxes rise more than those corporations would.”

The proposed constitutional amendment would levy an additional 4 percent tax on annual personal income over $1 million, but far more is included within the definition of “personal income” than most people realize.

S corporations are the most common business form in Massachusetts, accounting for 45.5 percent of all for-profit business entities.  The Commonwealth is unique in that it levies a “stinger tax” only on S corporations that is layered on top of the individual income tax.  If the tax hike amendment is adopted, some S corporations would pay 12 percent of their taxable income above $1 million to the state, while traditional corporations would pay an 8 percent excise tax.

Under the proposed amendment, the surtax would extend to “phantom income” that has been allocated but not distributed to the taxpayer.  That means these pass-through entities would pay taxes on income reinvested in business operations and expansion, hiring, capital improvements, durable equipment and infrastructure even though they haven’t received the money to offset the expenses.

Describing the phantom income problem, Suffolk Construction CEO John Fish has said “You’re taking what I would argue is the economic driver of job creation and… penalizing it.  It’s going to hearken back to the days of “Taxachusetts.”

Fish added that 25-to-35 percent of Suffolk’s net income is typically reinvested rather than being distributed to owners.  While he may not leave Massachusetts if the “millionaire’s tax” is adopted next year, he may begin to focus his business efforts elsewhere.

“We’re going to have to have an adult conversation,” he said.

About the Author

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 holds degrees from Harvard College, The Kennedy School of Public Administration, and the Sloan School at MIT.

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 Research

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.