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So You Want To Be A Millionaire? Can You Pay The Freight?

May 29, 2016

A poll this month suggests that about 70 percent of Bay State residents are in support of a “millionaire’s tax” here in Massachusetts that would add a 4% surtax on all income over a million dollars. Add this to the base rate of 5.1% and that means all income over a million dollars would be taxed at 9.1%. It’s easy to understand why this idea might resonate with folks. Afterall, the vast majority of Bay State residents are not millionaires, and you can understand why many people might think it only seems fair that the well-to-do kick in a little more. 

But to put it as simply as I can, taxes – even state taxes –  are complicated. Even if we all agree the tax system should be fair, we’re already all on different pages. Robert Tannenwald, economist and lecturer in public finance at Brandeis’ Heller School. says the only fair way is to have a progressive tax, where the more you make, the higher percentage of your income you pay in taxes.

"If you’re a millionaire and you had to pay an additional 3% of income in your taxes, you might have to give up the third Bentley in your car collection," he said.

But, he pointed out that same 3% hike on a lower income person might mean they can’t afford to take their child to the dentist.

"So the cost, in terms of pain, is much greater for the poor person than the rich person," said Tannenwald. "So a progressive tax system makes sense in terms of fairness."

33 states do it this way. Some have three or four different tax brackets, others have nine or 10. But not Massachusetts. We’re one of eight states with a flat tax. Everyone, regardless of income, pays 5.1%. And Nicole Kaeding, an economist with the Tax Foundation's Center for State Tax Policy, says this is really the only fair way to do it.

"A flat tax is what you want to be doing," she said. "So Massachusetts having a flat tax at 5.1% is closer to the ideal."

Except that income tax isn’t the only way the state collects taxes. There’s also, say, the sales tax and the gas tax. Noah Berger, President of the Massachusetts Budget and Policy Center, says that when you add these altogether, our tax system is actually regressive.  

"Most people pay, altogether, about nine-and-a-half percent of their income in taxes," he explained. "The highest income one percent of taxpayers pay about six-and-a-half percent, so we have a tax system that is adding to the inequality that we have."

Enter the so called “Millionaire Tax,” a proposal which just cleared its first big legislative hurdle here in the Bay State. The plan calls for a 4% surtax on all earnings above a million bucks, bringing the total tax rate on that money to 9.1%.

"This is part of a larger national trend," said Kaeding. "A number of states have considered or have passed a millionaire’s tax over the past few years."

Right now, three "states" -- California, New York and Washington, DC -- have true millionaire taxes. And they’ve not been without their controversy. Kaeding says some millionaires – and their tax revenue – have fled those states when . And many millionaire filers – thousands of them in Massachusetts - are actually small businesses, like sole proprietorships and LLC’s.

"There are definitely a number of family owned smaller businesses that are perhaps not really high income individuals that would be impacted by this tax increase," said Kaeding. 

Berger says that from what he’s seen in other states, fears that millionaires or businesses would flee the Bay State in any appreciable number are, perhaps, overblown.    

"Even though California has a top tax rate of 13%, there are still businesses in Silicon Valley – the economy in California is pretty strong. New York has comparable tax rates to this there are still plenty of millionaires in Manhattan," he said.

But those states already had a graduated income tax system when they added the millionaire bracket. In fact. nothing like the sudden 4% jump that Massachusetts is proposing has been tried before.

"In Massachusetts the effect could be larger than they were in these other states because there it was a more gradual increase in tax rates and in taxable income where here, this would be such a dramatic income," said Kaeding. 

This fact is not lost on Tannenwald.  

"Yes, I suppose in theory the high jump in rate creates a greater disincentive to work effort and business and industriousness," he said. "But in practice, I think there’s scant evidence that it would make such a great effect."

Berger and Tannenwald both stressed that the plan here calls for all revenue generated by the millionaire tax – by some estimates 1.9 billion each year – to be earmarked for two things, and only two things: education and transportation.

"Well the revenue is going to spent in ways that will help business," said Tannenwald. "Business is looking for a work force that is suitably trained for the modern economy and transportation is key cause they gotta get to work."

All of this is just the tip of the iceberg when it comes to the debate about whether this plan makes sense for Massachusetts. The good news is you have time to educate yourself. The legislature needs to again vote to approve the millionaire tax next year and only then will it go to the people as a ballot question in 2018.

So start studying up. Like I said, it’s complicated.

 


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