How to raise taxes — and get away with it

Cut spending or raise taxes? The most sensible answer for the future of the Commonwealth is to do both. And there’s a fair, politically safe way to bring in a significant amount of new revenue.

Governor Charlie Baker says Massachusetts has a spending problem, and it’s hard to disagree. Year-over-year spending this fiscal year is on track to increase 7.7 percent, with one multi-billion dollar line item, MassHealth, the state’s Medicaid program, up 13 percent. As Baker tackles a $1.8 billion deficit, his budget, released Wednesday, announces that a new era of fiscal discipline is about to begin.

Yet it’s also fair to say that Massachusetts has a revenue problem. That’s because the state budget will automatically grow by about $1 billion on its own, without any new discretionary spending, because of swelling fixed costs. MassHealth cost increases alone are expected to absorb about one-third of revenue growth anticipated in the next fiscal year.

Baker has reflexively rejected the idea of new revenue from new taxes or fees. But the problem with dogmatically avoiding the concept of new taxes is that it will neuter Massachusetts as an agent of economic change. As a regional economy that competes with many others, Massachusetts must be a force that can invest in a vision for long-term prosperity. If we only scrape by year to year, state government will effectively become a pass-through vehicle for providing health care, distributing state aid, and paying state workers’ pensions. Additional educational investment, the key to growing the economy, will be minimal. Public transportation infrastructure will continue to deteriorate.

Yet there is a fair and politically foolproof way of raising taxes to make targeted investments for the future. Massachusetts has been minting millionaire households for years. The Boston Business Journal reported last month that in 2012, the last year figures were available, about 13,700 households in the state reported at least $1 million in taxable income, up from 10,253 in 2010. The average income of these millionaire filers, according to the Department of Revenue, was $3.52 million.

Much of the new wealth stems from our ecosystem of intellectual capital that has created world-leading companies. The salaries can be sizable. And owning even a tiny piece of a growing company, through stock options, can bring outsized rewards.

As the income gap grows wider, Massachusetts can shave just a tiny fraction of tax revenue from its top earners. Let’s call it the Massachusetts Millionaire Surtax. Households earning over $1 million would pay an additional 1 percentage point in state taxes for every dollar they make over $1 million. So, for the first $1 million in taxable income, million-dollar earners pay the same as everybody else — 5.15 percent. If a household earns $1.5 million, then the taxpayer owes a 1 percent surcharge on the additional $500,000 — $5,000 in extra state taxes.

The surtax would have yielded about $340 million in new revenue in 2012. Given trends in the economy since 2012, that number would probably be north of $400 million in 2015. That’s enough fresh funding to make strategic investments, like targeting transportation infrastructure needs and focusing on early childhood education.

Simple, right? Not quite. This plan amounts to a graduated income tax, and would require a constitutional amendment — Massachusetts has a flat income tax embedded in its constitution. The last time the concept of a graduated income tax was presented to the voters was 1994, and it lost decisively. But times have changed, and a proposal to require the wealthiest Massachusetts residents to pay a fraction more in state taxes would likely have broad appeal and come with little political risk.

Setting a top income tax rate of 6.15 is hardly an uncompetitive move. Million-dollar earners in California pay a state tax rate of 13.3 percent. New York’s top state tax rate is 8.82 percent.

Some may argue that instituting a graduated income tax is a slippery slope, and in time will reach the middle class. That’s the primary reason that past graduated income tax efforts have failed — they have been worded too broadly, and not specifically targeted at top earners.

As Baker tries to restore some fiscal order, it’s up to Democrats to make sure there’s funding to make long-term investments in people and infrastructure. A Massachusetts Millionaire Surtax is the surest way to get there.

George Donnelly is the former editor the Boston Business Journal. Follow him on Twitter @geodonnelly.

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