“The Millionaire Tax”— Ballot Question #1 and What it Means for Massachusetts Millionaires

On November 8, Massachusetts residents will be asked to vote on Question 1. Colloquially known as the “Millionaire Tax” or the “Fair Share Amendment,” Question 1 asks voters to decide whether to amend the state constitution by instituting a 4% tax increase on income over $1 million.

Question 1 has been subject to a great deal of news and debate. In this post, we’ll talk about exactly what it does and how it could affect you.

What is Question 1?
Question 1 is a proposed amendment to the Commonwealth’s constitution that would establish an additional 4% state income tax on annual taxable income over $1 million. The funds raised from this tax would be used for public education, infrastructure, and transportation. If it succeeds, the proposed amendment will apply to tax years beginning on or after January 1, 2023.

The amendment applies only to personal income; businesses would not be affected.

If passed, the amendment will raise the tax on any income over $1 million from its current 5% to 9%. Someone making $1.5 million, for example, would pay 5% on the first million and 9% on the next half-million. The threshold will be adjusted each year to account for inflation.

Estimates for how much revenue the tax increase would bring in vary from $1.2 billion to $2 billion per year. Recent polls suggest that the amendment is likely to pass.

Read the full text of the proposed amendment here.

Current Situation in Massachusetts
The majority of states, and the federal government, have graduated income tax systems. However, the Massachusetts Constitution requires a single tax rate for all personal income. This makes it difficult to raise the income tax without disproportionately impacting lower-income households.

The state’s current tax on earned (salaries, wages, tips, commissions) and unearned (interest, dividends, and capital gains) income is 5%.

Nationwide, state income taxes range from 0% to 13.3%.

Who Does the “Fair Share Amendment” Affect?
There are approximately 21,000 taxpayers in Massachusetts with incomes of over $1 million. This equals only about 0.6% of all households; however, that 0.6% earned 22% of all taxable income in the state.

The highest earners, those making over $5 million a year, make up only .006% of Massachusetts taxpayers, but take in 11% of all income. Income for this group is generally made up of a combination of salary, capital gains, and business income.

It’s more common for families to experience a one-time million-dollar windfall, most often through the sale of a business or property, than to earn $1 million every year. The new tax could potentially affect those households.

Arguments Against the Amendment
Opponents argue that the “millionaire tax” will make Massachusetts less attractive to investors, make it harder for businesses to expand, and will cause wealthy families to move out of state, all of which could have a negative impact on tax revenues. They also point to the state’s current budget surplus of $1.9 billion as an indication that the new tax is not necessary.

Additionally, opponents argue that the tax unfairly penalizes taxpayers with one-time events, such as the sale of a house or business, that put them over the million-dollar mark, which could in turn impact their retirement savings.

Arguments For the Amendment
Proponents of the new amendment argue that the new revenue is necessary to improve public schools, repair bridges and roads, and make transportation faster and more reliable. They also argue that the amendment could advance racial and economic equity by moving dollars and services toward lower-income communities.

As for the argument that the tax would unfairly penalize “one-timers” who sell homes or businesses for more than $1 million, proponents of the amendment point out that the tax will be due only on the capital gains, not the full sale amount. Home sellers are also able to deduct $500,000 of the proceeds from the sale of a primary residence from their taxable income, so only a very small number of taxpayers would be likely to see their income rise above a million dollars in a single year.

Potential Impacts of the “Millionaire Tax”
Obviously, we won’t know the full ramifications of the amendment until and if it passes. However, some educated guesses about the possible impacts have been made.

A study from Tufts University Center for State Policy Analysis suggests that while some Massachusetts millionaires might seek a home elsewhere if the amendment is passed, the majority have strong ties to their communities and are unlikely to move elsewhere. The study also suggests, however, that the very highest earners are the most likely to move, which could have a disproportionate impact on state revenue.

The same study points out that high-income earners are the most able and most likely to seek ways to protect their wealth. By finding ways to reduce their taxable income, millionaires could actually end up paying less than they currently do since by doing so, they’ll avoid both the new 4% tax and the current 5% tax.

With no changes in behavior, the new tax would bring in approximately $2.1 billion in revenue for the state in 2023. However, accounting for millionaires who leave the state and find ways to shelter their money, that number is likely to be closer to $1.3 billion.

However, while the new tax revenue is clearly earmarked for specific spending, it is possible that the money could end up simply replacing current funds rather than raising the amounts for those categories. It would require an ongoing commitment from politicians and oversight by the public to ensure that the new revenue increases funds in these areas and is used for substantial improvements of public works.

How Will the New Amendment Affect You?
Whether you’re anticipating a “one-time windfall” or are regularly earning more than $1 million a year, the new amendment, if passed, could have consequences for you. We urge you to discuss your situation with a qualified tax expert who can help you make smart decisions about your money.