Study Pegs Wealth Surtax Haul At $1.3 Billion

Relocations, Tax Avoidance Will Reduce Take By $670 Million

A new tax on Massachusetts millionaires would add about $1.3 billion in revenue for the state, according to a new report that analyzes the potential impact of the proposed surtax on high-income earners that voters will consider on the ballot in November.

Massachusetts lawmakers voted last year to put a constitutional amendment on the 2022 ballot that would add a 4 percent surtax on household income above $1 million, pledging to dedicate the additional revenue to just two areas of spending: education and transportation.

The analysis done by the Center for State Policy Analysis at Tufts University offers a fresh estimate of how much money could be generated by the tax code change, and it largely confirms revenue projections made last year by the Beacon Hill Institute, though without as many dire warnings of the tax’s impact on the economy.

The report estimates that if approved by voters the new tax would be collected from about 21,000 state taxpayers, or less than 1 percent of all households in the state, who earn about 22 percent of all taxable income in Massachusetts. Using state and federal data, the center estimated that 2,000 households earned more $5 million in 2019 totaling 11 percent of all income in the state.

The projection takes into account the likelihood that some high-earners could leave Massachusetts as a result of the policy, while others will engage in “tax avoidance” strategies to lower their tax burden.

“Some high-income residents may relocate to other states, but the number of movers is likely to be small,” the report concludes, relying on research done in other states like California and regions of Spain that suggest Massachusetts could lose 500 families and about $100 million in tax revenue from relocation.

The reason for the small number of relocations, the report suggests, is that wealthy families tend to be connected to their communities with kids in schools and other ties, while those that do move are likely to be the wealthiest of the payers. Some taxpayers may simply shift their permanent residence out of state, while remaining in Massachusetts for much of the year, the report contends.

Moves out of state and tax avoidance measures are projected to reduce the state’s overall revenue from the income surtax by 35 percent in 2023, down from a possible $2.1 billion if no behavorial changes were accounted for. The report attributed about $670 million of the lost revenue to tax avoidance.

“Even accounting for that, it still seems like an approach that will raise substantial revenue and in a way that advocates say it will from higher earners in a progressive way,” said Evan Horowitz, executive director of the Center for State Policy Analysis.

A new poll released Thursday from the MassINC Polling Group found that 70 percent of registered voters support the ballot question, including 44 percent who said they strongly support a surtax that would be spent on transportation and education. Only 10 percent of those surveyed said they were still unsure.

While the Center for State Policy Analysis arrived at similar projections as a study done by the more conservative Beacon Hill Institute last year, Horowitz said he does not see the same risk to the state’s economy.

Both independent estimates are lower than the $1.6 billion to $2.2 billion projected by the Department of Revenue in 2015, though the state agency did not attempt to factor in behavorial changes such as relocation.

“Our static estimate is very similar to their,” Horowitz said of DOR.

The Beacon Hill Institute projected the wealth surtax would generate $1.23 billion in new taxes in 2023, but also said it would cost the state 9,329 private sector jobs in the first year and reduce the number of working households by 4,388, mostly due to high earners leaving Massachusetts for lower cost states. The think-tank forecast a $431 million decrease in gross state product, a $931 million decrease in real disposable income and $7 million in lost investments.

Horowitz, however, said the impact on the Massachusetts economy is likely to be “small.”

“The reasons we come to similar numbers is totally different. We don’t see the substantial risk from depressed economic activity and large number of people moving out of state,” Horowitz said. “It’s chiefly an accounting issue, not an economic one.”

The report attributes its more optimistic economic forecast to the relatively small size of the tax increase compared to the overall economy and the fact that while avoidance measures will decrease the state’s tax haul on paper it will not reduce significantly the amount of wealth available to be spent and invested in the economy.

“Critics of the proposal sometimes argue that it would cost jobs and blunt economic growth. But just as decades of research on tax cuts have failed to reveal large stimulative effects, tax increases of this size are unlikely to meaningfully dampen economic activity,” the report says.

One unknown, the report acknowledges, is how the money will be invested.

While the ballot question states that it must be spent on education and transportation, all state spending is still subject to appropriation by the Legislature and there’s the risk that the money, once pooled together with other revenues, will be used to replace existing spending instead of solely to increase investments.