Mass. prepares for fight over proposed millionaires’ tax

Tomohiro Ohsumi/Bloomberg/file 2009

The war over a Massachusetts millionaires’ tax is about to begin.

On Wednesday, legislators gave preliminary support to the measure, firing the first shot in what could be a long, contentious fight to raise taxes on those earning more than $1 million — and use the money to make far-reaching investments in education and transportation.

Early surveys suggest broad support among voters, but victory is far from assured. For one thing, backers need something more than a new law; they need a constitutional amendment — because at present the state constitution doesn’t allow for differential tax rates.

Plus, opponents have their own arsenal of powerful arguments, including concerns that millionaires would simply move away, doubts about how the new revenue would really be spent, and a general preference for fixing the state budget by keeping taxes low and cutting wasteful spending.

What motivates this call for a millionaires’ tax?

1. Every year for the last decade, legislators have scrambled to fill a wide budget deficit, leaving little left over for investments in education or transportation.

2. With inequality on the rise, more and more of the money earned in the state ends up in the pockets of the very richest.

3. When it comes to state and local taxes, those wealthy, inequality-benefiting families actually pay a lower overall tax rate than middle-class and poorer families.

4. A tax on millionaires could therefore raise substantial new revenue while at the same time making our tax system more fair.

What, exactly, is being proposed?

Supporters want to add a paragraph to the state constitution, creating a new 4 percent surtax on all income over $1 million — and stipulating that revenue from this tax be used for public education and transportation.

Roughly 20,000 households in the state would be affected by the new tax, according to the state Department of Revenue. That means we’re talking about the top 0.5 percent of households. The remaining 99.5 percent would see absolutely no change in their tax bills.

The state could expect to raise about $1.9 billion additionally every year with this tax. Just to give some context, that’s about the same amount of money then-Governor Deval Patrick sought for his own 2013 proposal to invest in education and transportation.

Note that there’s no boundary problem here. If you make $999,999, you’re not subject to the tax. But if you cross the threshold and earn $1,000,001, only the extra dollar is taxed. So you’d owe just 4 cents for the millionaires’ tax. And to keep up with inflation, the cut-off would increase every year.

Don’t the rich already pay more in taxes?

Not when it comes to state and local taxes in Massachusetts. Like most US states, Massachusetts has a regressive tax system.

When you add together the full spectrum of taxes, including the income tax, sales tax, property tax, and excise taxes, lower-income families actually pay a higher overall tax rate than rich families.

An analysis from the left-leaning Institute on Taxation and Economic Policy found that while poor and middle-income families pay about 10 percent of their income in state and local taxes, the highest-earning families pay just 6.5 percent.

Even if the millionaires’ tax passes, the situation won’t change all that much. The top 1 percent will still pay a lower overall tax rate than the average household.

Would millionaires flee Massachusetts?

Some millionaires may leave the state if the new tax passes — particularly those with looser family and community ties.

But when you look at other states with elevated taxes on high-income folks, it turns out this effect is surprisingly small. Set against the millionaires who do take flight are others who move in and plenty of rising millionaires who choose to stay — whether for the schools, to maintain the business connections they’ve made, or to stay grounded in their home communities.

That said, the loss of just one or two super-millionaires can cause unexpected budget turmoil. That happened in New Jersey this year, when the richest state resident took off for Florida, depriving the state of hundreds of millions of tax dollars.

Will the money really be used for education and transportation?

The amendment states that all revenue raised by the millionaires’ tax must support “quality public education,” “affordable public colleges,” and “the repair and maintenance of roads, bridges and public transportation,” which could mean a spending boost of around 20 percent for these priorities.

Opponents, however, are not convinced that the money will be spent as promised, pointing to legal uncertainty about whether the constitution can be used to control legislative spending.

But legal arguments aside, it’s also true that money is fungible. Even if the constitutional language is binding, and all the revenue from the millionaires’ tax goes to education and transportation, that doesn’t necessarily mean the state will make big investments in those areas. It might be able to keep the current spending levels, use the new tax dollars to cover a portion of those costs, and then do what it likes with the money that’s been freed up because there’s a new, dedicated source of education and transportation funding.

In reality, this is unlikely. A big infusion of new tax dollars will probably boost spending on education and transportation. But it’s not necessarily because of binding language in the millionaires’ tax. It’s because these are top legislative and popular priorities, areas where the Legislature would be eager to invest their new resources.

Why will this fight continue through 2018?

Amending the state constitution is a multistep process. First, a quarter of legislators have to approve the amendment, which is what’s happening Wednesday. Then, in the 2017-2018 legislative session, they have to approve it again. Only then can it go to voters in the form of a ballot initiative.

This lengthy process has a potentially worrisome correlate. If it turns out there’s an error or problem with the amendment — or merely some ambiguity requiring clarification — addressing it could require another four-year process of constitutional re-amendment.

Aren’t there better ways to free up money for public investments?

When a state budget is out of balance, there aren’t a lot of options. Either you cut spending on state programs, find temporary fixes, or raise new revenue.

Massachusetts has mostly been following the path of small cuts and temporary fixes. And we seem to be reaching the limit of that strategy. Among other things, regular raids on the state’s “rainy day” fund have drained away money that’s supposed to be reserved for tough economic times, even though we’re in the midst of a steady economic recovery.

And while it’s true that a faster-growing economy might ease our budget woes — filling state coffers with the proceeds from rising incomes and profits — the growth would have to be truly unprecedented to match the revenues from a millionaires’ tax. Something like 6 to 8 percent every year, when it’s currently more like 2 to 3 percent.

After years of chronic budget deficits, and little evidence that economic growth and state cutbacks can fix the root problem, advocates are once again making the case for new revenue.

For now, polls show that roughly 70 percent of Bay Staters support the millionaires’ tax. But, there’s plenty of time for minds to change, and history gives reason for caution. This isn’t the first time advocates have tried to create a tiered tax system via constitutional amendment, and each prior attempt ended in defeat.