Massachusetts Dodged a Bullet With Its Rejected Millionaire's Tax
Over $2 trillion of wealth moved between states from 1995 to 2010, as individuals and companies relocated from poorly governed, high-tax states to their better managed neighbors. That trend is about to kick into overdrive thanks to the tax reform President Trump signed into law late last year. But many state policymakers still seem unaware that they’re competing for income and investment with their counterparts across the U.S. in this high-stakes game – either that, or they’re actively trying to lose.
Just look at Massachusetts, which only this week narrowly escaped a new wealth-destroying tax thanks to the state’s top court. In a 5-2 decision, the Supreme Judicial Court struck down a ballot initiative that would have nearly doubled the tax rate on incomes over $1 million per year, from 5.1% to 9.1%, canceling a referendum effort supported by labor unions and “progressive” activists.
The proposed “millionaire’s tax” was indeed illegal. For one thing, the state constitution explicitly forbids targeting different income levels with different tax rates, forcing the authors to fall back on the old bureaucratic ploy of a “surtax” whose proceeds are earmarked to fund specific programs – in this case, education and transportation. However the state constitution also requires that any new tax be logically related to the programs it is intended to fund (for example, a surtax on liquor to fund alcohol treatment programs) and the tax completely failed that test, as reflected both in the impossibly broad target group and the grab bag of projects it was meant to fund. Instead, it was exactly what it appeared to be: a blatant attempt to subvert the state’s own laws by levying a higher tax rate on income above an arbitrary threshold.
This punitive tax wasn’t just unconstitutional: it would have been toxic for Massachusetts’ economic competitiveness, prompting a renewed flight of personal and corporate wealth to other states with lower taxes and more efficient government. In an era of ever-greater financial and physical mobility this is not something Massachusetts – or any state – can afford to do.
Living up to the unflattering nickname “Taxachusetts,” over the last few decades the commonwealth drove away hundreds of thousands of people and billions of dollars of income with its historically high tax burden, and it continues to bleed wealth at an alarming pace. From 1992 to 2016 Massachusetts lost $17.26 billion in annual adjusted gross income to other states, and is still losing AGI at the rate of around $1,823 per minute, or almost a billion dollars a year. In population terms from 1985 to 2016 it experienced a net outward migration of 287,845 people with other states.
Indeed wealthy individuals wouldn’t have to look far to find a more welcoming economic environment: it’s right over the border in New Hampshire. With no income tax but levies on interest and dividends, the Granite State has one of the lowest tax burdens in the country, and it has enjoyed net gains in personal income as a result: from 1992 to 2016 it gained a total $4 billion in AGI, mostly at the expense of neighbors in New England and the Northeast, including a $4.1 billion net gain from Massachusetts and a combined total of almost $1.3 billion from Connecticut and New York (partially offset by losses to sunbelt states like Florida, the Carolinas and Arizona).
New Hampshire is currently soaking up AGI from other states at the rate of $423 per minute, while it attracted net inward migration of 51,390 people from other states from 1985 to 2016, both very respectable figures considering its small size. With Manchester, NH located just 50 miles from Boston, it’s quite plausible for wealthy individuals to work or maintain businesses in Massachusetts while enjoying the perks of low-tax residency in New Hampshire; in fact, thousands of people already do. Even more ominous for Massachusetts, many may choose to find new jobs or relocate businesses closer to home, draining employment and deepening the income hole even more: it’s worth noting that New Hampshire currently has an unemployment rate of 2.7%, compared to 3.5% for Massachusetts and 3.8% for the U.S.
Massachusetts dodged an economic bullet this time, but reasoned court judgments are no guarantee commonsense will prevail in the state legislature in future. Policymakers there, as elsewhere, urgently need to understand that trillions of dollars of wealth are up for grabs, and the future prosperity of their state at stake. Whatever short term revenue gains they may squeeze out, higher taxes are not the way you generate wealth; it’s how you make it leave.
