Economist Sees Surtax Avoidance, Rather Than Relocation

The projected impact of the state’s new surtax on income above $1 million is likely to be a topic discussion at Tuesday’s revenue hearing and one economist tapped to testify at those hearings said Thursday that while it “seems to be a force in that direction” of leading high-earners to flee Massachusetts, he expects more millionaires will look for other ways to avoid paying the new tax.

During a conference hosted by the Federal Reserve Bank of Boston, Northeastern University economist Alan Clayton-Matthews fielded a question about the 4 percent surtax on annual household income in excess of $1 million that went into effect Jan. 1 and the potential for the policy to drive wealthy residents out of Massachusetts, an argument that surtax opponents have long been pushing.

“As as an economist weighing costs and benefits, I mean, that seems to be a force in that direction. The question is, is that large or is that small?” he said. Clayton-Matthews said that he does not “anticipate a large exodus out of the state because of this new tax” and referred to a study from the Center for State Policy Analysis at Tufts University.

“What they found is mobility of persons has been pretty small. But tax avoidance is the more powerful way in which high-income taxpayers avoid paying taxes,” he said.

The cSPA study, released a year ago, concluded based on research from other states like California and regions of Spain that Massachusetts could lose about 500 families and about $100 million in tax revenue from relocation. But legal tax avoidance strategies — like structuring transactions in a way that minimizes reported taxable income or curtailing stock trading — could reduce the state’s surtax revenue by about $670 million. The report estimated a total of $1.3 billion in annual state revenue from the surtax.

“Maybe a third of the extra income tax we would have gotten if there were no behavioral changes would be due to tax avoidance almost entirely rather than fleeing the state,” Clayton-Matthews said.

Officials at the Massachusetts Society of CPAs said last month that 75 percent of member accountants surveyed said they are now more likely to advise their clients to change their domicile out of Massachusetts because of the surtax.