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Shirley Leung

Answers to your questions about the millionaires tax

Karsen Eckweiler works at Democracy Brewing in Boston and is featured in the latest ad that supports Question 1, a ballot measure to raise taxes on the wealthy.Jonathan Wiggs/Globe Staff

Will small-business owners in Massachusetts get hurt if voters approve a question on the November ballot to raise taxes on the wealthy?

TV ads opposing Question 1 offer an unequivocal yes. But the latest ad from a coalition that supports the surcharge argues small-business owners stand to benefit because the measure will raise an additional $2 billion annually that can be spent on education and transportation.

“Small businesses like ours have struggled during COVID. Question 1 is a great opportunity to make things better for everyone,” Karsen Eckweiler says in the ad. She’s one of the worker-owners of Democracy Brewing in Boston. “That means more jobs and better opportunities. That’s good for all businesses big and small.”

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So which is it?

Both ads feature elements of truth, but the devil is in the details.

It’s true that some small-business owners will get hit with an additional 4 percent surcharge if they earn an annual income over $1 million. Typically, this happens when they sell their businesses. In fact, about half of the households in Massachusetts that make over $1 million are so-called one-time millionaires. They earn that kind of money just once because of profits they’ve made from selling a business, a home, or long-term investment.

So let me put a finer point on this: Not every small business or homeowner will pay the extra tax. Some will, but they represent a tiny fraction of all taxpayers.

Will that distinction be enough to help you decide how to vote?

But wait, there’s much more to deliberate. I’ve heard from many readers who have asked excellent questions about who is and isn’t affected by Question 1, how the money will be spent, and why we need extra revenue when the state budget is enjoying a surplus.

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Here are answers to frequently asked questions about the so-called millionaires tax proposal:

Q. Can a good accountant or financial planner help “one-time millionaires” minimize the impact of the surcharge?

A. Yes, it’s possible. But there is only so much you can do, according to financial experts. When selling a business, home, or property, you can spread the profits over more than one tax year in what is known as an installment sale.

But you’ll need approval from the state Department of Revenue, and the strategy comes with risks. For example, if you do an installment sale of a small business and the business goes bankrupt soon after, there might not be any profits left to receive in future years. Most people selling their businesses opt for a lump-sum payout from the buyer.

Charitable deductions to offset income is also another strategy, such as setting up a Donor Advised Fund the year you expect a significant windfall.

“Even the most creative accountants still have to follow the tax law,” said Shannon Ouellette, a financial planner with Northwestern Mutual Financial Network, which has several branches in the Boston market. “There are some flexibilities, but it’s not like, ‘Here’s the magic wand and everyone’s problems are solved.’”

Cranberry farmer Leo Cakounes appears in a new ad aired by opponents of the so-called "millionaires tax."Courtesy of No on Question 1

Q. Will more wealthy people move out of Massachusetts to states like Florida and New Hampshire that do not tax regular income?

A. “I hate advising people to do it,” said Jeffrey Levine, a partner at Newton accounting firm Alkon & Levine. “I just feel badly that they feel forced to lose some of the Boston culture ... but more important, I feel terrible that the state loses their revenue.”

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Many accountants would advise someone to pack and move to reduce tax liability. A September poll by the Massachusetts Society of CPAs of its members indicated that 47 percent would be more likely to recommend that clients move out of the state if Question 1 passes.

A study by Tufts University’s Center for State Policy Analysis estimates that the amount of revenue collected from Question 1 could be reduced by as much as 35 percent between tax avoidance strategies and millionaires moving.

That’s worrisome to Levine. “When people leave, that puts more pressure on those who are staying to pay what’s needed,” he said.

Q. Massachusetts has one of the most expensive housing markets in the country, and it’s not uncommon to have a substantial gain when selling a home. Should I be worried?

A. If Question 1 passes, the first $1 million continues to be taxed at the five percent income tax rate that everyone pays. It’s the next $1 million or more, that is taxed at nine percent.

Let’s say you bought your primary residence in 1992 for $550,000. You and your spouse sell the house today for $3.5 million. As a couple, you get a $500,000 tax exemption, and after paying brokerage and other fees, your net profit on the sale is $2.6 million.

This same household also draws another $100,000 in income, perhaps through a salary or investments. That brings its total income to $2.7 million. The state tax bill today would be $135,000 compared with $203,000, if Question 1 passes.

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In 2021, only two percent of Massachusetts home sales resulted in a gain of more than $1 million, according to analysis by the Massachusetts Budget Policy & Center.

Still, some voters might get spooked because real estate — whether it’s your primary residence, vacation home, or rental property — can be a significant source of wealth that would now be subject to a new tax.

Q. Why can’t there be a carve-out for one-time millionaires?

A. Senator Jason Lewis, who co-sponsored the legislation that put Question 1 on the ballot, said it’s unclear whether lawmakers can tweak the measure like they have with other ballot initiatives. That’s because it would mean amending the state constitution.

“It would probably go to the courts,” said the Winchester Democrat.

But if you’re asking this question, Lewis thinks you’re missing the point. He believes the public sector is woefully underfunded, especially in education and transportation, and the new tax would allow the state to pay for programs and services citizens deserve such as a world-class transit system.

Even one-time millionaires, he added, can afford to pay a little more.

“It’s not asking them to pay higher taxes every year,” Lewis said.

People gather at a Cambridge home on Aug. 14, 2022, to discuss canvassing for Question 1. Pat Greenhouse/Globe Staff

Q. Isn’t this ballot measure a back door to the state implementing a graduated income tax?

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A. Most states have what is known as a graduated or progressive income tax: The more you earn, the more you pay in taxes. Massachusetts has a flat tax rate, which means everyone pays the same rate.

“I wish we could have a graduated income tax in Mass. That would be better tax policy,” said Lewis. “This is not a back door. This is not a cracked door. The door is still dead-bolted shut on a graduated tax.”

That’s because changing the income tax structure would require an amendment to the state constitution, which would require a lengthy and complicated process. Question 1 represents such a change, and it has been nearly a decade in the making.

Q. The state budget has a record surplus, as well as billions of dollars in federal relief money it has yet to spend. Why does it need more money?

A. Surpluses come and go, and the federal pandemic money is a one-time allocation. Question 1 allows for an annual stream of money to boost spending in education and transportation, such as expanding early education and helping to pay for the rebuilding of the two Cape Cod bridges.

”To have high-quality schools and world-class infrastructure, we need to be able to invest every year, year in and year out, not just have one year’s windfall,” said Phineas Baxandall, senior policy analyst and advocacy director at the Massachusetts Budget & Policy Center, which supports Question 1.

My colleague Matt Stout reported last week that while the ballot measure designates the revenue to go towards education and transportation, there’s no guarantee that lawmakers will actually increase spending in those areas.

Lewis, however, told the Globe that he will advocate for the new tax money to “be additional dollars over and above funding that is already provided.”


Shirley Leung is a Business columnist. She can be reached at shirley.leung@globe.com.