How much new revenue does the tax generate? remains an educated guess, with estimates ranging from $1.2 billion to more than $2 billion per year. The exact amount will depend on the strength of the economy and the stock market, and whether the new law, critics warn, will trigger a wave of tax avoidance strategies and a brain drain. The pandemic has accelerated outmigration from Massachusetts, and accountants expect more high-net-worth households to relocate, especially now that more people can work from anywhere.
In April, when taxpayers filing their first quarterly payments for 2023, the state will get its first glimpse of what the so-called millionaire tax could mean. But the fuller picture won’t come into focus until April 2024, when the first full-year results are due.
Typically, legislators make corrections to ballot measures after they have been approved, as voter-led legislation can be a less than perfect process. But on Question 1, while the legislature has broad authority over the tax structure, there is little political will at the moment to make changes. With Maura Healey elected governor, Beacon Hill is controlled by Democrats, and she and many other Democrat politicians supported the millionaire tax.
“It is unlikely that the Legislature will take any significant action in the short term,” said Eileen McAnneny, President of the Massachusetts Taxpayers Foundation. “It might be a couple of years before they see the tax implications of all this.”
In the longer term, however, there are opportunities for tinkering.
Legislators can create exceptions and reductions that affect what counts as taxable income. If an unusually high number of so-called one-time millionaires — people who make a fortune by selling their home or business — are hit by the new tax, lawmakers could decide to raise the home sales exemption to $800,000 for a couple. for example, from $500,000 to reduce taxable income.
Legislators are more likely to propose technical fixes, e.g. B. keeping the new income from the additional tax in a separate account instead of the general fund, making it easier to track how it is spent.
The millionaire tax is designed to fund education and transportation, but the voting measure doesn’t guarantee lawmakers will actually increase spending in those areas, and one of the biggest criticisms of the measure is whether Beacon Hill can be trusted to spend the proceeds appropriately.
House Minority Speaker Bradley H. Jones, who opposed Question 1, said he would support legislation to put the new taxpayer money in a separate account.
“I’d like to think that both supporters of the question and opponents of the question should think that’s a good idea,” he said.
Jones also said he would like the Legislature to have a broader discussion of what constitutes education and transportation spending. Can the money be used to raise teachers’ salaries, for example? Or should the focus be building schools, keeping class sizes small, or funding the landmark Student Opportunity Act that addresses inequalities between school districts?
Jones also has similar questions about transportation: Should the state prioritize Repairs and maintenance, and should there be a reserve for regional transit systems, not just MBTA?
“Inevitably, we’re going to find 5 billion ways to spend $2 billion,” he said.
And it’s an open question how much impact the new money will have. Even $2 billion would increase only a fraction of the state’s $10 billion education budget and $3.8 billion in transportation spending. It’s also not clear how much the tax will generate; The state estimates that about 26,000 households, or less than 1 percent of taxpayers, will be affected, and experts predict many people will work to minimize their bill.
Concerned taxpayers may defer some income to this tax year, e.g. B. Selling a business now instead of waiting until next year. Wealthy households can also move their full-time residence to another state to avoid the higher tax.
“No one just packs up and actually leaves Massachusetts,” said Amy Pitter, president of the Massachusetts Society of CPAs and former commissioner of the state department of revenue. “These are people who already have a home in Florida, already have a home in New Hampshire. So you change your domicile. They spend two extra weeks in Florida to meet the requirements. The bar for that is pretty low.”
In 2021, Massachusetts lost 46,000 residents, the country’s fourth-highest exodus, according to census data. A growing number of wealthy residents have left: In 2009, the median adjusted gross income of people leaving Massachusetts was about $57,000; In 2019, the most recent year data was available, the figure was about $101,000, according to an analysis by the Massachusetts Taxpayers Foundation.
A flat tax rate has helped Massachusetts remain economically competitive and an attractive place to live for wealthy individuals, said Timothy Vermeer, a senior policy analyst at the Tax Foundation, a Washington think tank that has warned of the negative impact of Question 1.
Now, however, he expects Massachusetts to fall from 34th to 46th in the Foundation’s ranking of state tax competitiveness. He predicts that around 1,800 wealthy households could leave the state in the coming year, based on studies of other states that have raised taxes on high earners.
While lawmakers could implement estate tax reform and cut other taxes, those fixes would not be enough to offset the impact of Question 1, Vermeer said.
“You try to close the barn doors after the horses are out,” he said. “There should be reform in those areas, but I think it’s less economically helpful now with the income tax rate so high.”
But for the supporters of Question 1, the potential benefits of the new tax outweigh the risks.
“Companies keep talking about the need for better transportation infrastructure, and they keep talking about the difficulty of finding qualified workers,” said Peter Enrich, professor emeritus of tax law at Northeastern University, who advised supporters of the ballot measure. “These are things that we’re about to start pumping a significant amount of new money into and that’s going to make a big difference to the economy.”
That’s the theory. With the millionaire tax, which took almost a decade to gain voter approval, it remains to be seen what will happen in practice.