Massachusetts Votes for Millionaires Tax

Why would a state with more than sufficient tax revenue increase the burden for its financially successful citizens? 

If you’re a millionaire in the US, instead of being rewarded for your enterprise, we believe you’re being used as a punchbag. With every punch swung in misplaced anger.

In this article, we cover the developments in Massachusetts, but before we do, let us reassure our American readers that there are ways to live in the US and reduce your tax burden. 

To discover how you can legally reduce your taxes, protect your assets, and enjoy more freedom, get in touch here. 

Massachusetts Says Yes

On Tuesday, November 8, 2022 Massachusetts voted yes to a 4% surtax on taxpayers with a net income exceeding $1 million. 

The millionaires’ tax became fully operational on January 1, 2023. Before the vote,  Massachusetts had a flat income tax rate of 5% (except a 12% rate applied to short-term capital gains and collectible gains), irrespective of how much income the taxpayer earns. 

This was the sixth attempt since 1915 to amend the Massachusetts tax system from a flat to a progressive rate on more significant earners. 

The rationale was explained in the Massachusetts Constitution, as follows: 

“To provide the resources for quality public education and affordable public colleges and universities, and for the repair and maintenance of roads, bridges, and public transportation, all revenues received in accordance with this paragraph shall be expended, subject to appropriation, only for these purposes.”

In her first budget proposal, newly appointed democratic governor Maura Healey earmarked the $1 billion raised specifically for education and child care initiatives and public transportation infrastructure.

Pros and Cons of the Millionaires Tax

Those who support the state tax insist that only 0.6% of Massachusetts taxpayers will pay the increased income tax rate, according to the Center for State Policy Analysis at Tufts University.

They also assert that the funds are legally obligated to fund the greater good, such as public transportation spending, public education, roads, and bridges.

Citizen initiatives such as Fair Share Massachusetts assisted by teachers’ unions, generated more than $31 million to campaign for the change. 

The bulk of its support was drawn from state and national teachers’ unions, with the Massachusetts Teachers Association raising $15.5 million and the American Federation for Teachers $6.7 million.

The Massachusetts Teachers Association, the primary financial backer of the campaign, labeled the new tax as “an important step forward to creating tax fairness.”

Yet those who oppose the new income tax rate, including business groups, are adamant that the funds raised won’t necessarily benefit these specific causes.  

They argue that the tax hike will lead to an exodus as small businesses, entrepreneurs, and investors leave Massachusetts. Higher earners could then head to lower-taxed states, such as Florida and New Hampshire.

Opponents, like us, maintain that the millionaire tax is detrimental to economic growth, and new start-ups, and could result in economic stagnation. In addition, they are right in saying that Massachusetts already generates sufficient tax revenue. 

The evidence for this, as former Republican Governor Charlie Baker claimed, is ‘unprecedented’ surplus revenue in 2021, which saw taxpayers in Massachusetts receive nearly $3 billion in tax refunds. 

The tax windfall was triggered by Chapter 62F of state law, requiring the government to send $2.941 billion back to its taxpayers. 

Despite the arguments of both sides, when it came to voting, the result was impossible to predict with any great certainty. However, Massachusetts voters ensured the tax reform got through with a narrow 52% of the vote.

Negotiating the Fallout of the Millionaires Tax

The ‘Stop the Tax Hike’ Amendment Coalition viewed the results as “a setback for the Massachusetts economy, a setback for small business owners, a setback for retirees, and a setback for homeowners.”

Small business owners now face an 80% increase in state income tax. They had banded together in 2018 to put together a legal challenge to a similar ballot, but were defeated.

However, with passing of the millionaires tax, strategies to combat the extra income tax include making transfers of income-producing assets to trusts domiciled outside Massachusetts. This could mean moving assets to more tax-favorable states, such as Nevada and Delaware.  

Opponents also expressed reservations that the tax increase would be unfair to taxpayers who don’t realize $1 million of income ordinarily but who might have one exceptional year due to cashing in on a business or property. 

Income exceeding $1 million from such a sale after December 31, 2022, is taxed in Massachusetts at nearly double the rate (9% vs. 5%) that would apply if the sale occurred before 2023.

Massachusetts taxpayers close to retirement age could also be negatively targeted. Instead of being rewarded for relinquishing a long-term investment, they will be punished.

The obvious way out is to relocate to another state with lower tax rates. That is the ultimate get-out clause. Florida, for example, has no state income tax, after all.

Yet changing one’s address isn’t as easy as acquiring a new driver’s license. The Massachusetts Department of Revenue (DOR) is renowned for punitively auditing taxpayers who try to alter their domicile. Going non-resident on your tax return will represent a red flag.

The stop the tax hike bid may have failed in Massachusetts. Yet, California voters rejected a similar income tax increase and North Dakota voters look set to return the state to be a flat-income tax state. So, there are local solutions, through a constitutional amendment, to federal issues relating to income tax rates.

At Nomad Capitalist, we suggest that maybe you should think beyond election day and what it means for your state constitution. Election results are all well and good, but you can limit the effect on your annual earnings by agreeing to a holistic plan that sees you diversify your investments and reduce your tax.