For months, voters were presented with two stark visions of what might happen if they approved a ballot measure to raise taxes on the wealthy: Massachusetts would have better schools and the T could be finally fixed — or the state would suffer a brain drain that cripples the economy.
Now that Question 1 has passed, the reality is we won’t know for years the full impact of this historic change to the tax structure. The tax, which takes effect Jan. 1, will increase the state’s 5 percent income tax rate to 9 percent on annual income exceeding $1 million.
How much new revenue the tax generates remains an educated guess, with estimates varying from $1.2 billion to more than $2 billion a year. The exact amount will depend on the strength of the economy and stock market, as well as whether the new law, as critics have warned, triggers a wave of tax avoidance strategies and an exodus of wealthy people. The pandemic has accelerated out-migration from Massachusetts, and accountants expect more high-net-worth households to relocate, especially since more people can work from anywhere these days.
In April, when taxpayers who file quarterly submit their first 2023 payments, the state will get its first glimpse of what the so-called millionaires tax might mean. But the fuller picture won’t start coming into focus until April 2024, when the first full-year returns are due.
Typically, legislators make fixes to ballot measures after they’ve been approved, because lawmaking by voter petition can be a far from perfect process. But with Question 1, though the Legislature has broad authority over the tax structure, there’s little political will right now to make changes. With the election of Maura Healey as governor, Beacon Hill will be controlled by Democrats, and she and many other Democratic politicians supported the “millionaires tax.”
“It’s unlikely that the Legislature would make any significant moves in the short term,” said Eileen McAnneny, president of the Massachusetts Taxpayers Foundation. “It could be a couple of years before they see how this all plays fiscally.”
In the longer run, though, there are ways to tinker.
Lawmakers can create exemptions and abatements that would affect what counts as taxable income. If an unusually high number of so-called one-time millionaires — people who experience a windfall from selling their home or business — get hit by the new tax, the Legislature could decide to raise the exemption on home sales to $800,000 for a couple, for example, up from $500,000, to help lower taxable income.
It’s more likely lawmakers will propose technical fixes, such as keeping the new revenue from the extra tax in a separate account instead of the general fund, making it easier to track how it’s spent.
The “millionaires tax” is supposed to fund education and transportation, but the ballot measure does not guarantee the Legislature will actually increase spending in those areas, and one of the biggest criticisms of the measure is whether Beacon Hill could be trusted to spend the revenue appropriately.
House minority leader Bradley H. Jones, who opposed Question 1, said he would support legislation to put the new tax money in a separate account.
“I would like to think both proponents 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 fuller discussion on what constitutes education and transportation spending. Can the money go toward giving teachers raises, for instance, or should the focus be on building schools, keeping class sizes small, or funding the landmark Student Opportunity Act that addresses inequities among school districts?
Jones also has similar questions about transportation: Should the state prioritize repairs and maintenance, and should there be a set-aside for regional transit systems, not just the MBTA?
“Inevitably we will 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 add but a fraction to the state’s $10 billion education budget and $3.8 billion in transportation spending. Nor is it clear how much the tax will generate; the state estimates it will affect roughly 26,000 households, or less than 1 percent of taxpayers, and experts predict many people will work to minimize their bill.
Concerned taxpayers may shift some income to this tax year, such as selling a business now instead of waiting until next year. Wealthy households may also change their full-time residence to a different state to avoid the higher tax.
“Nobody is packing up and actually leaving 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 what they’re doing is changing their domicile. They’re spending an extra two weeks in Florida so they meet the requirements. The bar for doing these things is quite low.”
In 2021, Massachusetts lost 46,000 residents, the fourth highest out-migration in the country, according to census data. A growing number of wealthy residents have departed: In 2009, the average adjusted gross income of people leaving Massachusetts was about $57,000; in 2019, the most recent year that data was available, the figure was about $101,000, according to an analysis by the Massachusetts Taxpayers Foundation.
Having a flat tax rate has helped Massachusetts remain economically competitive and an attractive place for wealthy individuals to live, said Timothy Vermeer, senior policy analyst at the Tax Foundation, a Washington think tank that has warned about the negative impact of Question 1.
Now, though, he expects Massachusetts will fall to 46th, from 34th, in the foundation’s rankings of state tax competitiveness. He predicts that roughly 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 the Legislature could implement estate tax reform and cut other taxes, Vermeer said, those fixes won’t be enough to offset the impact of Question 1.
“You’re trying 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 helpful economically now with the income tax rate so high.”
But to Question 1 proponents, the potential benefits of the new tax outweigh the risks.
“Businesses are constantly talking about the need for better transportation infrastructure, and they are constantly talking about the difficulty of finding skilled workers,” said Peter Enrich, an emeritus professor of tax law at Northeastern University who advised the ballot measure’s supporters. “Those are things that we’re about to start pumping a significant amount of new money into, and that is going to make a big difference to the economy.”
That’s the theory. For the “millionaires tax,” which took nearly a decade to wend its way to voter approval, what happens in practice remains to be seen.