Jeff Soulard, CPA/PFS, CFP® and Joshua Nathanson
July 7, 2017
Last month, the Massachusetts Legislature approved a constitutional amendment, known as the “Millionaire’s Tax”. If adopted (as described below), the amendment will add a 4% surtax on all taxable income above $1,000,000.
Under the Massachusetts Constitution, amendments proposed by petition are known as initiative amendments, and those proposed by a legislator are known as legislative amendments. For all amendments, legislators attend a constitutional convention. If enough legislators agree on the amendment–50% for legislative amendments and 25% for initiative amendments–there is another convention a year later. If that convention passes the amendment, there is a referendum.
Proposed by petition, the “Millionaire’s Tax” is an initiative amendment. Consequently, the amendment needed 50 of the 200 seats in each convention for a referendum. At the most recent convention, 134 legislators voted for the amendment, and 55 voted against. At a convention in May of 2016, 135 legislators voted for the amendment, and 57 voted against. Now, there is only one step left in the three-year process. The amendment will be a question on the 2018 ballot for the voters of Massachusetts to decide.
The amendment could become law as early as January 1, 2019. The tax rate on income over $1,000,000 generally would increase to 9.1%, but the tax rate on Short-Term Capital Gains could increase to 16%.
Perhaps more concerning than the rate increase, the amendment would restructure the Massachusetts income tax. While Massachusetts has different classes of income, there is only one rate for each class. The amendment would transition Massachusetts from a single rate to multiple rates for each class of income, opening the door for a more complex system with multiple tax brackets for each class of income.
|MA Tax on Income in Excess of $1 million|
|Class of Income||Current||Proposed|
|Short-Term Capital Gains||12.0%||16.0%|
|Long-Term Capital Gains||5.1%||9.1%|
Based on current estimates, the surtax would impact nearly 20,000 taxpayers and raise roughly $1.9 billion of additional tax revenue. The largest burden would fall on the top 900 taxpayers, who would pay more than $1 billion in additional taxes.
Moreover, the amendment would significantly change how Massachusetts tax rates compare to those of other states. Currently, there are 44 states (including the District of Columbia) with some form of an income tax. The Massachusetts ordinary income tax rate of 5.1% is the 28th highest ordinary income tax rate in the U.S. If the surtax is added, the Massachusetts rate will be the 5th highest. Additionally, the 16% tax on Short-Term Capital Gains would be the highest state tax rate in the country.
|Top Tax Rates 2017
According to supporters, the amendment provides revenue needed for education and transportation, especially in Western Massachusetts. Many also believe that the Massachusetts income tax should be more progressive, mostly because poorer households spend a higher percent of income on other taxes.
Opponents argue a ballot vote cannot allocate money, and with an estimated revenue shortfall of nearly $500 million for 2017, legislators likely will reallocate revenue from the surtax. Some predict that high-income households will move to other states, increasing taxes on middle-income households in Massachusetts.
The top-tax-rate debate is not unique to Massachusetts. Earlier this year, Maine added a 3% tax on taxable income over $200,000 to raise revenue for public education, increasing the top tax rate to 10.15%, just one year after decreasing the top rate to 7.15%. Several states and the District of Columbia already have some form of “Millionaire’s Tax” in place, and others are considering similar policies in response to revenue shortfalls.
The Colony Group constantly monitors tax policy for changes that will impact our clients. If you have any questions about the Massachusetts “Millionaire’s Tax” or other potential or actual policy changes, please contact your financial counselor.