Why would a state with more than sufficient revenue from taxes increase taxes for millionaires? If you’re a millionaire in the US, instead of being rewarded for your enterprise; you’re being used as a punchbag. With every punch swung with misplaced anger.
Before we cover the recent developments in Massachusetts, let us reassure our American readers that there are ways to save on taxes in the USA without renouncing your citizenship.
Massachusetts Says Yes
Tuesday, November 8, was the day Massachusetts voters voted yes on Ballot Question 1, resulting in a 4% surtax on Massachusetts taxpayers with a net income exceeding $1 million. This has become known as the millionaires tax. It becomes fully operational on January 1, 2023, when the state’s constitution is amended to add four percentage points to the state’s income tax for yearly revenue above $1 million.
In 2022, Massachusetts has 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. Question 1 was the sixth attempt since 1915 to upgrade the Massachusetts tax system from a flat rate to progressive rates enforcing higher rates on more significant earners. With the passing of Question 1, Article XLIV of the Massachusetts Constitution will be updated to incorporate the following:
“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 addition to the taxes on income otherwise authorized under this Article, there shall be an additional tax of 4 percent on that portion of annual taxable income over $1,000,000 (one million dollars) reported on any return related to those taxes.”
“To ensure that this additional tax continues to apply only to the commonwealth’s highest income taxpayers, this $1,000,000 (one million dollars) income level shall be adjusted annually to reflect any increases in the cost of living by the same method used for federal income tax brackets. This paragraph shall apply to all tax years beginning on or after January 1, 2023.”
Pros and Cons of the Millionaires Tax
If you live in Massachusetts, the millionaires tax are three words you have heard ad nauseam this year.
Those who support the state income 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, proved decisive. They generated more than $31 million to campaign for Question 1. 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 Question 1 ballot initiative campaign, labeled the new tax voters approved “an important step forward to creating tax fairness.”
Yet those who opposed the new income tax rate, including business groups, are adamant that the funds voters approved won’t necessarily benefit these specific causes and that the tax hike amendment will lead to an exodus as small businesses, entrepreneurs, and investors leave Massachusetts. Higher earners look set to head to lower-taxed states such as Florida and New Hampshire.
In addition, critics of the increased income tax rate maintain that Massachusetts generates sufficient tax revenue as it is. Otherwise, it would not be paying out such extensive tax refunds.
The new state income tax was opposed because it would be detrimental to high earners. If small business owners faced greater income taxes, would that deter new startups? Could the ballot measure result in economic stagnation?
Earlier in 2022, Governor Charlie Baker declared that the Commonwealth raised so much tax in 2021 that it triggered Chapter 62F, an obscure statute of the state legislature that was only previously invoked in 1987. Chapter 62F dictates that Massachusetts is obligated as a state to issue federal tax refunds to taxpayers if it raises tax revenue above a specific threshold. That threshold was penetrated in 2021, and rumored calculations suggest Massachusetts taxpayers will get refunds equivalent to around 13% of their 2021 tax liability.
When it came to voting, it was evident that taxpayers appreciated both the pluses and minuses of the millionaires tax, with the vote impossible to predict with any great certainty. However, Massachusetts voters ensured Question 1 narrowly got through with approximately 52% of the vote, with Massachusetts switching to a progressive tax regime taxing the highest earners at a higher income tax rate for the first time since 1915.
Negotiating the Fallout of the Constitutional Amendment
Massachusetts residents will now have to wake up to the consequences of the state‘s income tax hike. As the income tax filing deadline approaches, taxpayers will face unexpected tax situations.
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 faced an 80% increase in state income tax. They had banded together in 2018 to put together a legal challenge to a similar ballot, but four years later, they were defeated.
Now that the millionaires tax is set to be applied, Massachusetts taxpayers who face increasing tax rates have some ways of softening the blow. If they sell an asset at a gain between now and year-end (before the new law becomes operational), they don’t have to pay the surtax.
Expect a rush on artwork sales, appreciated securities, operating businesses, and real estate before everybody starts to wish everybody a Happy New Year and the tax hike kicks in.
If you have an eligible gain as a taxpayer, you may contemplate deferring and even eliminating those gains somewhat through investment in qualified opportunity funds.
Similarly, if you invest in real estate, you could defer gain by engaging in Internal Revenue Code Section 1031 like-kind exchanges for other properties. Further strategies to combating the extra income tax include taxpayers making transfers of income-producing assets to trusts domiciled outside Massachusetts.
Question 1 haters expressed their 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, will be taxed in Massachusetts at nearly double the rate (9% vs. 5%) that would apply if the sale took place before 2023.
Massachusetts taxpayers close to retirement age would 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 Dreaming? It has no state income tax, after all.
Now, as Boston businesses look to entice employees to return to the office, many of their workforces are having to get their head around the commute replacing remote work. One state’s loss is another state’s gain, however. It won’t just be individuals moving but companies too.
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. 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, by way of a constitutional amendment, to federal issues relating to income tax rate.
At Nomad Capitalist, we would 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.
We are newshounds and keep abreast of all new tax developments such as increasing taxes.
So, instead of moving to North Dakota, how about relocating to North Caicos?