Proponents of taxing the rich in the service of shoring up the state’s education, transportation and infrastructure are well meaning, but shortsighted.
Schools and transportation agencies need funding to address problems exacerbated by the pandemic, but adding a surcharge to annual income above $1 million sets us up for a further economic fall.
The measure, which could appear on the 2022 ballot, adds a 4% tax on incomes above $1 million for the purpose of providing funds for public education, roads and bridges, and public transportation. The tax would be in addition to the state’s 5.05% flat income tax, for a total tax rate of 9.05% on income above $1 million.
It seems simple enough to those who back such a move: We need money, you have money, it’s only fair you give it to us.
All of which ignores real-world fallout.
A new study published by the Pioneer Institute found that the tax hike amendment could devastate innovative startups who rely on Boston’s financial services industry for funding. This in turn would hinder the region’s post-pandemic recovery.
If passed, the surtax would give Massachusetts the highest short-term capital gains tax rate in the nation and the highest long-term capital gains tax rate in New England. Good news for realtors in New Hampshire, not so much for the Bay State.
“The particularly punitive aspect of this proposal for investors is that, unlike at the federal level, capital gains can push you into a higher tax bracket under the surtax,” said Greg Sullivan, who co-authored A Grim Distinction: Massachusetts would have top marginal short-term capital gains tax rate in the U.S. under the proposed graduated income tax, with Andrew Mikula. “That could be a significant deterrent to people who would otherwise have invested in small businesses as they emerge from the COVID crisis.”
Research has shown that every job created in a high-tech firm supports the creation of up to five more jobs in other sectors of the economy. These other jobs often include low-skill service positions. The graduated income tax would provide a huge disincentive to taxpayers to invest in Massachusetts companies.
“It’s an obvious point that promoters of the surtax cannot respond to: Such sky-high taxes on capital gains will lower the level of investment activity in the state. Why that matters is that over the past several decades, Cambridge, South Boston and other areas have enjoyed a remarkable economic renaissance driven by innovative firms,” said Pioneer Institute Executive Director Jim Stergios. “Our innovation clusters rely heavily on Boston’s strong investment industry. If we put the investment industry at a disadvantage, we will weaken our innovation clusters, the demand for products and services from industries that do business with our innovation clusters, and ultimately job creation.”
Case in point: Boston’s Innovation District, aka the Seaport. This tidy chunk of city real estate was booming pre-pandemic, as tech firms and creative companies flocked to the startup-friendly area. Office buildings, then condos sprouted like weeds, and following them, restaurants and retail. The domino effect of entrepreneurial support can’t be underestimated.
Nor should it be undermined. Throwing a wrench into the business-funding machinery would do nothing to help Boston, and the state, recover and grow.
That is as much a priority as education and infrastructure.