Editorial Staff

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

/in , , , , /by Editorial Staff
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

Report Contrasts State Government and Private Sector Employment Changes During Pandemic

Massachusetts state government employment has been virtually flat during COVID-19 even as employment in the state’s private sector workforce remains nearly 10 percent below pre-pandemic levels, according to a new study published by Pioneer Institute. The study, “Public vs. Private Employment in Massachusetts: A Tale of Two Pandemics,” questions whether it makes sense to shield public agencies from last year’s recession at the expense of taxpayers.

Study Finds Massachusetts Graduated Income Tax May Be a “Blank Check” and Not Increase Funding for Designated Priorities

Advocates claim a proposed 4 percent surtax on high earners will raise nearly $2 billion per year for education and transportation, but similar tax hikes in other states resulted in highly discretionary rather than targeted spending, according to a new policy brief published by Pioneer Institute. That same result or worse is possible in Massachusetts because during the 2019 constitutional convention state legislators rejected — not just one, but two — proposed amendments requiring that the new revenues be directed to these purposes.

Report: Proposed Graduated Income Tax Might Not Increase State Education and Transportation Spending

While supporters of a state constitutional amendment that would impose a 4 percent tax rate hike on annual income over $1 million claim additional revenue from the surtax will fund public education and transportation needs, the amendment in no way assures that there will be new spending on these priorities. In fact, without violating the amendment, total state education and transportation funding could stay the same or even fall, according to a new review published by Pioneer Institute.

New Study Highlights Economic Fallout from California’s 2012 Tax Hike

A 2012 income and sales tax increase in California, named “Proposition 30,” stifled business activity, accelerated out-migration among the wealthy, and ultimately reduced the state’s tax base, according to a new study published by Pioneer Institute that aims to share empirical data about the impact of tax policy decisions.

New Study Finds Pandemic-Spurred Technologies Lowered Barriers to Exit in High-Cost States

Both employers and households will find it easier to leave major job centers as technologies made commonplace by the COVID-19 pandemic have led to a rethinking of the geography of work, according to a new study published by Pioneer Institute.

New Study Shows Significant Wealth Migration from Massachusetts to Florida, New Hampshire

Over the last 25 years, Massachusetts has consistently lost taxable income, especially to Florida and New Hampshire, via out-migration of the wealthy, according to a new Pioneer Institute study. In “Do The Wealthy Migrate Away From High-Tax States? A Comparison of Adjusted Gross Income Changes in Massachusetts and Florida,” Pioneer Institute Research Director Greg Sullivan and Research Assistant Andrew Mikula draw on IRS data showing aggregate migration flows by amount of adjusted gross income (AGI). The data show a persistent trend of wealth leaving high-tax states for low-tax ones, especially in the Sun Belt.

California Tax Experiment: Policy Makers Receive Valuable Economics Lesson

0 Comments
/
Host Joe Selvaggi talks with Stanford University Economics Professor Joshua Rauh about his research on the reaction of Californians to a tax increase, from his report, “The Behavioral Response to State Income Taxation of High Earners, Evidence from California.” Prof. Rauh shares how his research offers tax policy makers insight into the likely effects of similar increases in their own states, including here in Massachusetts.

New Study Finds Tax Policy Drives Connecticut’s Ongoing Fiscal & Economic Crisis

Multiple rounds of tax increases aimed at high earners and corporations triggered an exodus from Connecticut of large employers and wealthy individuals, according to a new study published by Pioneer Institute.

Pioneer Report Spotlights Decade-long Building Boom in Massachusetts Construction Industry

In the lead-up to the COVID-19 crisis, the Massachusetts construction industry enjoyed a boom in select subsectors, though employment numbers had yet to recover from the setbacks of the Great Recession, according to a new report from Pioneer Institute that draws data from the MassEconomix web tool.

Pioneer Checklist Includes Steps for Policy Makers, Business Owners to Revitalize Hardest-Hit Industries

Combining the recommendations of studies published earlier this year, Pioneer Institute has released “A Checklist for How to Revitalize the Industries Hit Hardest by COVID-19.” The recommendations for policy makers are organized in three sections: Immediate Relief, Tax Policy Changes and Permanent Reforms.  Business owner recommendations are split into COVID-19 Health and Safety Protocols, Expanded Services and Steps to Improve Cash Flow.