Massachusetts Voters Approved a ‘Millionaires Tax’ (Commentary)

This past week, all eyes were on races that would determine who controlled legislative power in states and Congress. But important as those races were, just as important were ballot measures around the country. One such measure in Massachusetts is likely to intensify the exodus of high-income taxpayers to greener pastures.

The ballot question, over an amendment unimaginatively dubbed the “Fair Share Amendment,” determined whether or not to impose a 4 percent surtax on Massachusetts residents making over $1 million annually. Voters approved the measure by a narrow margin.

The tax’s passage appears likely to create economic opportunities—for real estate agents, moving companies, and tax accountants. Massachusetts was already one of the biggest losers from tax migration, a trend that is likely only to accelerate with the state sending a clear signal it intends to use wealthy taxpayers who stay as cash cows.

The National Taxpayers Union Foundation recently analyzed the latest IRS tax migration data (looking at migration trends between 2019 and 2020), and found that Massachusetts was the 4th-biggest loser from tax migration. In total, the IRS found that Massachusetts was losing over 20,000 households annually representing a total of $2.6 billion in adjusted gross income.

A recent analysis by Tufts University found that the new tax would raise $1.3 billion in 2023. On the other hand, it also found that tax avoidance and taxpayers moving to other states would cut 35 percent from the expected revenue, which would have been $2.1 billion otherwise.

In other words, while in the short term the tax will raise money, it will do so at the cost of shrinking the state’s tax base and encouraging more aggressive tax avoidance. Pushing wealthy taxpayers to greener pastures while at the same time increasing the state’s reliance on the tax income of those same wealthy taxpayers is a counter-intuitive proposition.

Unfortunately, the unsustainability of this dynamic is a large reason why states have been steadily more aggressive about pursuing tax income from taxpayers who do not physically reside in their jurisdictions. During the pandemic, Massachusetts enforced a so-called “convenience of the employer” rule, whereby it claimed the right to tax remote workers who moved out-of-state so long as they could possibly have continued doing the same work in-state.

New Hampshire ended up challenging this rule all the way up to the Supreme Court, which foolishly dismissed the case after Massachusetts stopped enforcing the rule, possibly believing the question was settled. It wasn’t — not only were taxpayers hit by this unreasonable assessment during the period it was in force out of luck, but Massachusetts could reinstitute the rule at any time. Taxpayers fleeing the state’s onerous tax burdens may well push Massachusetts to do that.

What’s more, Massachusetts isn’t the only state using this type of rule to keep taxpayers from getting out of its grasp. Delaware, Nebraska, New York, and Pennsylvania all currently enforce a convenience of the employer rule, while New Jersey is considering doing so and Connecticut enforces a retaliatory version.

At the same time, these states’ aggressiveness provides an opportunity for other states that are managing to attract taxpayers (voluntarily) through more competitive tax codes. This includes not only states with no income tax like Florida and New Hampshire, but also states like Arizona that simply have competitive tax rates.

Ever-increasing taxes on an ever-shrinking base of wealthy taxpayers is an unsustainable fiscal plan for states, even with the most aggressive strategies to keep taxpayers from fleeing. States should avoid the mistake of “Taxachusetts” and seek to treat their residents fairly, not as sources of politically cheap revenue.