New tax on high incomes could generate at least $1.4 billion next year, state officials project

The Massachusetts State House.Carlin Stiehl for The Boston Globe

State revenue officials said Tuesday they could collect at least $1.4 billion — and perhaps up to $1.7 billion — next fiscal year from Massachusetts’ newly enshrined tax on its wealthiest earners, kick-starting months of debate over how to steer the new injection of tax money.

The projection, offered Tuesday in a legislative hearing, marked the first official estimate state officials have provided on what they think the so-called “millionaires tax” will contribute to coffers in its first year since taking effect Jan. 1. Narrowly passed by voters on the November ballot, the measure increases the state’s 5 percent income tax rate to 9 percent on annual income exceeding $1 million.

How much the new surtax could generate has been an open question. Last year, the administration of former governor Charlie Baker, who personally opposed the ballot measure, estimated it could produce $1.2 billion in the “near term,” while the Massachusetts Budget & Policy Center, a left-leaning think tank that supported the measure, estimated it was likely to generate at least $2 billion annually.

There’s also still uncertainty about where the money ultimately goes. The tax was pitched to voters as a way to dedicate new funding to education and transportation initiatives, but the newly approved constitutional amendment does not in fact guarantee the Legislature will actually increase spending in those areas. Economists on Tuesday further urged the Legislature to cap what it initially spends from the tax, arguing it may be too volatile to rely upon in its first year.

Geoffrey Snyder, the state’s revenue commissioner, told state and lawmakers Tuesday his department expects to collect between $229 million and $265 million from the new surtax in the final six months of the fiscal year that ends in June. He also projected the state could see anywhere from $1.45 billion to $1.77 billion in the fiscal year that starts in July, the first full budget period the tax will be in effect.

The numbers help provide a baseline on which state and legislative leaders will build their revenue estimates in the coming weeks. But the tax remains one of the biggest wildcards as Governor Maura Healey begins shaping her first annual state budget proposal and lawmakers follow with their own plans this spring.

While the money is tabbed for education and transportation, state officials have not said whether they intend to split it evenly among those priorities. Advocates also are pushing legislative leaders to pursue other changes, including funneling the proceeds into a separate trust — where they and the public can better track them — and exempting some homeowners from having to pay it at all.

State officials have estimated the surtax will affect roughly 26,000 households, or less than 1 percent of taxpayers.

Doug Howgate, president of the business-backed Massachusetts Taxpayers Foundation, urged lawmakers on Tuesday to not use any of the revenue the tax generates this year, and to cap how much it dips into next year at $500 million while the state gains a handle on the money it could produce.

“The cap that we suggested is, I think, one way to do it,” Howgate said. “That’s not to say there could be another approach that makes sense as well.”

State officials weren’t alone in offering estimates of revenue, either. Evan Horowitz, the executive director of the Center for State Policy Analysis at Tufts University, told lawmakers it would be “safe and sensible” to budget for $750 million to $1 billion in high income tax revenue next year. Any amount past that, he said, could then flow to a savings account to “smooth future spending.”

Alan Clayton-Matthews, an economist and Northeastern University professor emeritus, meanwhile said he expects it could generate $528 million this fiscal year and another $1.1 billion in the next. He said ultimately expecting about $1.2 billion, on average, in revenue “seems reasonable.”

“Just because a revenue source is volatile doesn’t mean it’s not useful,” Clayton-Matthews said.

There are also wider questions of the new tax’s impact. During the closely fought ballot campaign, opponents warned it could spur tax avoidance strategies and waves of wealthy people to leave the state, both undercutting the revenue the tax could collect and the state’s overall competitiveness. Even agents who have been negotiating with the Boston Red Sox have said they’ve been factoring the new tax into the calculus when contemplating offers.

In a report last year, Horowitz estimated the state “might lose” roughly 500 families, cutting expected revenue from the new tax by about 5 percent and costing Massachusetts roughly $100 million this year.

Snyder, the state’s revenue commissioner, said whether numerous wealthy taxpayers ultimately leave “is part of the discussion,” but it was difficult to tell, at least from data, whether it was already happening.

“I don’t believe we’ve seen anything in the tax receipts at this point,” he said.