On June 9, 2021, the Massachusetts legislature voted overwhelmingly to approve S.5, a proposal to legislatively amend the state’s constitution effective January 1, 2023, to impose a 4% additional tax on income in excess of $1 million, subject to annual adjustment for increased costs of living. The passage of S.5 paves the way for the proposal to appear as a state ballot measure in 2022, and avoids procedural issues that allowed opponents to convince the Massachusetts Supreme Judicial Court to put a stop to a nearly identical ballot measure in 2018. If voters approve the ballot measure, the state’s personal income tax rate will go up from a flat 5% on wages, long-term capital gains, dividends, interest, and other income, and 12% on short-term capital gains. This increase will give Massachusetts the highest personal income tax rate on short-term capital gains in the nation, and will align the state’s personal income tax burden with California, New York, and Minnesota rather than other states in the region.
RSM State and Local Tax policy experts share their views on this development.
Brian Kirkell: The rapid progression of this tax increase back to the ballot should come as no surprise. The original ballot measure in 2018 had broad support and was very likely to pass when it was stricken for violating the prohibition against combining multiple independent subjects in a single ballot measure (in this instance funding for education and transportation). The legislative constitutional amendment process avoids this procedural problem, and there is a high likelihood that this particular tax increase will happen. But, should it? Flush with higher-than-ever federal funding and above-forecast state tax revenues, the Massachusetts seems well positioned to replenish its rainy day fund, increase funding for education and infrastructure, and win the post-COVID boom without raising taxes. It seems like strange timing to set out to deliberately make living and investing in California look more attractive from a state tax perspective, especially with New Hampshire right next door and Florida looking like it is not so far away in the emerging flexible work environment. Massachusetts is clearly betting that the state’s well-educated workforce, top-rated health care system, and overall economic strength will outweigh an additional 4% tax in the minds of entrepreneurs, business owners, and highly compensated employees. But, that is a bet Massachusetts did not have to make.
David Brunori: I agree with Brian that the timing of a push for significantly higher taxes on the wealthy seems odd. Massachusetts does not appear to need more revenue at this moment. As Brian noted, the measure seems unnecessary. I am less sure that the people of Massachusetts will vote to support this measure. I think many folks in the Bay State will be weary of returning the Commonwealth to a land of high taxes. Older residents will certainly remember that their state was once known as Taxachusetts! More fundamentally, I think raising taxes on the wealthy is a poor policy choice. The wealthy can and do move. If the pandemic has taught us anything it’s that some people can work from anywhere. If it passes, the rich will not flee overnight of course. There is a cost to moving. But overtime the commonwealth will find out that taxing their wealthy citizens in this manner will result in, well, more of them living in New Hampshire or other tax friendly climates.
Although this ballot measure has yet to become law, Massachusetts taxpayers, particularly those with substantial short-term capital gains, should model the impact of a 4% tax increase, and consider whether relocation is a viable option.