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Massachusetts Considers a Millionaire Tax

2 min readBy: Nicole Kaeding

Massachusetts could be the next state to adopt a millionaire’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . Yesterday, the legislature passed the first hurdle in passing a new constitutional amendment establishing the new tax. If adopted, the amendment would create a 4 percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on income above $1 million.

The Boston Globe has more details on the proposed tax change:

The state Department of Revenue estimates that the amendment would generate between $1.6 billion and $2.2 billion in additional state tax revenues in 2019. The agency estimates that 19,500 returns will be affected. That’s about one-half of 1 percent of all returns filed with the Department of Revenue.

The amendment would direct the new infusion of revenue to only transportation and education, though there is a debate over the constitutionality of that provision.

The $1 million threshold would be adjusted to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. to prevent bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. .

The proposal is being presented as a tax on the state’s wealthy residents, but it could also hit a number of pass-through businesses. Internal Revenue Service data for 2013 lists approximately 9,000 filers in Massachusetts with adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” above $1,000,000 that included income from partnerships or S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s and approximately 3,000 filers with net business income.

These filers represent the bulk of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. returns too. Sixty-two percent of all partnership and S corporation net income in Massachusetts comes from returns with more than $1,000,000 in adjusted gross income.

Currently, the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate in Massachusetts is 5.1 percent. It has been decreasing over the last several years due to a set of tax triggers passed in 2002. If specific requirements are met, the rate falls by 0.05 percent a year. It cannot fall below 5 percent.

The draft amendment passed overwhelmingly with 135 of the 200 legislators supporting the measure. Only 50 were needed for passage.

This is just the first step in the process of amending the constitution. Legislators need to reapprove the amendment at some point in the 2017-2018 legislative session, and then, it would be placed on the November 2018 statewide ballot for voter approval.

Several other states, such as New York and California, have similarly-styled millionaire’s taxes.

Massachusetts has made significant progress shedding its old moniker of “Taxachusetts.” If adopted in 2018, this proposal would move Massachusetts in the wrong direction.