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CLT UPDATE
Wednesday, June 14, 2017
Graduated Income Tax vote today
|
State lawmakers are expected to vote
Wednesday to place a constitutional amendment on the 2018
ballot that would raise taxes on the rich and direct the
money to transportation and education.
Approval by the Legislature could
potentially shift the fight over the so-called millionaires’
tax to the courts, where business groups are working on a
legal challenge in hopes of derailing the measure before it
could reach voters.
If those efforts fail, the amendment could
then head to the ballot, where early polling suggests it
enjoys overwhelming support.
Business groups have argued the tax will
hurt the economy, while labor, religious, and community
groups say it will raise much-needed revenue to fix
crumbling roads and rails and improve schools.
The amendment would scrap the state’s flat
income tax rate of 5.1 percent and create a two-tiered
system. Starting in 2019, all earnings over $1 million would
be taxed at a rate 4 percentage points higher....
Business groups argue the money may not
materialize because some wealthy residents will leave the
state rather than pay the higher tax. They also point to
language in the amendment that they say would allow
lawmakers to spend the revenue on items other than
transportation and education. Business groups have suggested
that this language could be the focus of a legal challenge.
The Boston Globe
Wednesday, June 14, 2017
Will ‘millionaires’ tax?’ appear on 2018 ballot?
We’ll find out Wednesday
We applaud the efforts of the business
community to head off the backdoor graduated income tax
before it reaches the 2018 ballot (“Business groups to fight
‘millionaires tax,’ ” Business, May 27). A graduated income
tax would hurt the economy and send the “Taxachusetts” label
screaming around the country once more. Passage would only
encourage the big spenders to inevitably target lower-income
groups next.
In 1975 the Legislature gave a lopsided 84
percent “yes” vote to send the graduated income tax to the
1976 ballot, where it was defeated by a more than 2-1
margin. In 1994 the Legislature gave a resounding 62 percent
“yes” vote to send the graduated tax to the 1994 ballot,
where it was again defeated by a better than 2-1 margin. In
1980 the Legislature voted 146-5 against Proposition 2½. On
the ballot that fall, Proposition 2½ passed by an almost
60-40 margin. Notice a trend here?
Citizens for Limited Taxation was
fully aware of this disconnect when we put Proposition 2½ on
the ballot, campaigned against the graduated income tax
ballot questions in 1976 and 1994, and put rollback of the
“temporary” income tax increase on the 2000 ballot. We are
aware of it now as we fight this latest graduated tax
scheme.
Chip Faulkner
Director of Communications
Citizens for Limited Taxation
Attleboro
The Boston Globe
Monday, June 5, 2017
LETTERS
Lawmakers never learn — tax increases get a ‘no’ vote
High-income taxpayers in Massachusetts who
have the flexibility to move out of state would have
"substantial incentive" to do so if an income surtax is
approved, taking their wealth and major tax contributions
with them and causing the so-called millionaire's tax to
backfire on proponents, according to a new analysis.
The Massachusetts Taxpayers Foundation
analysis, released two days before lawmakers are expected to
vote to place a constitutional amendment on the 2018 ballot,
lays out a case against the proposal, which proponents say
will force households with incomes above $1 million a year
to pay their "fair share."
The tax burden of those targeted by the plan
would grow from 21 percent to 29 percent of total annual
income taxes, and affected taxpayers may respond with their
feet, the report says. Calling it a "serious threat to the
fiscal stability and economic well-being of the
Commonwealth," the analysis predicts the surtax will lead to
"confusion and litigation" and undercut efforts to attract
capital. The taxpayers foundation's members include many
large businesses.
"The millionaire's tax does not align with
the state's economic interests because it taxes talent -
Massachusetts' principal competitive advantage," the
analysis says. "The appeal is easy to understand - it is
projected to raise almost $2 billion per year; does not
require legislators to take a vote on a tax increase; and
targets a small number of wealthy taxpayers. But as the old
adage suggests, if it sounds too good to be true, it
probably is."
State House News Service
Monday, June 12, 2017
Income surtax taxes talent, could backfire on Massachusetts,
MTF says
The Massachusetts Taxpayers Foundation
released the warning two days before the Legislature gathers
in a constitutional convention, where lawmakers are expected
to vote to place the so-called millionaire’s tax on the 2018
ballot....
Unions and liberal groups argue the proposal
would raise $1.9 billion annually, money that’s needed to
fund improvements in transportation and education.
But the foundation says the amendment would
“tax talent – Massachusetts’ principal competitive
advantage.” ...
Even if the revenue were to materialize, the
foundation says, the money would not necessarily fund
transportation and education, because the Legislature could
decide to spend it on other things or use it to plug annual
budget gaps.
The foundation also warns that if lawmakers
conclude the tax is harming the economy, it would take four
years to change it or repeal it, because it would require
another constitutional amendment.
Raise Up Massachusetts, the coalition of
community, religious, and labor groups that has sponsored
the amendment, blasted the foundation’s analysis as “wrong
on the law and wrong on the impact.”
“The millionaires who fund the Massachusetts
Taxpayers Foundation are clearly terrified that voters are
going to ask them to pay their fair share in taxes, because
the foundation is deliberately trying to mislead legislators
and the public,” the coalition said in a statement.
Raise Up disputed the notion that the money
might not be spent on education and transportation, saying
the amendment leaves no wiggle room because “the
Constitution is binding on the Legislature.”
The coalition also said studies have shown
that when New Jersey, Oregon, and Maryland raised taxes on
top earners, that did not spark a mass exodus of wealthy
residents....
“What does matter for building our economy
is making sure we have a well-educated workforce and
transportation infrastructure that works, and we do that by
investing,” said Noah Berger, president of the left-leaning
Massachusetts Budget and Policy Center, which has sided with
Raise Up Massachusetts in the fight over the proposed tax.
The Boston Globe
Tuesday, June 13, 2017
Business-backed group says proposed tax would chase away top
earners
Raise Up and the left-leaning Massachusetts
Budget and Policy Center argued that millionaires are more
firmly rooted into their communities than those with more
modest incomes. Citing research from Stanford University and
U.S. Treasury economists, the policy center wrote that
millionaires are more likely to be married, have children
and own a business, all of which correlate to staying
put....
While declining to take a firm stance on the
proposal, Gov. Charlie Baker said some have already spent
the anticipated tax dollars "six ways to Sunday."
"The past four budgets demonstrate why these
funds may never be appropriated for education or
transportation, even if legislators support these causes,"
MTF wrote. "Confronted by budget gaps of $1 billion or more,
lawmakers have used all available funds to close shortfalls
every year since FY 2015."
Raise Up claimed the text of the proposed
amendment "ensures" the money raised would be spent on
transportation and public education, and said a provision of
the constitution "already dedicates revenue from the gas tax
and other sources to the transportation needs."
State House News Service
Tuesday, June 13, 2017
Surtax backers say mobility fears about wealthy are
overstated
Connecticut's coffers are feeling the pinch
of the state's super-rich no longer paying what they used to
in personal income taxes.
New figures released last week show tax
revenue from the state's top 100 highest-paying taxpayers
declined 45 percent from 2015 to 2016. The drop adds up to a
$200 million revenue loss for the state....
"When you look at the top 75, top 50 ...
this is a group of wealthy people who are dramatically less
wealthy than they were before," said Kevin Sullivan,
commissioner of the Connecticut Department of Revenue
Services. "These folks, for a number of reasons, are either
not realizing as much income or don't have as much
income."...
Sullivan acknowledged part of revenue
decline can also be attributed to "a handful" of wealthy
individuals who moved to more tax-friendly states — an issue
frequently raised by legislative Republicans, who argue
Connecticut's tax policies encourage the state's super-rich
to move out.
In contrast with some of his fellow
Democrats, Gov. Dannel P. Malloy has urged the General
Assembly to steer clear of legislation that targets the
state's wealthiest taxpayers, including a proposed 19.5
percent tax on hedge funds. The "mere discussion of it in
our state, year after year," he said, is harmful to
Connecticut's commerce and reputation....
New Jersey experienced such a problem in
2016 when a hedge-fund billionaire declared himself a
resident of Florida. David Tepper also moved the hedge
fund's official headquarters to Florida, resulting in a
total estimated revenue loss of hundreds of millions of
dollars to the state.
Malloy's warnings follow a 2016 report to
Connecticut's Commission for Economic Competitiveness that
determined the industries adding the most jobs in the state
are paying an average wage of $54,018 a year. Meanwhile,
industries with shrinking employment in Connecticut pay an
average wage of $75,246. The same report also found
Connecticut is losing young and educated people to other
states.
Associated Press
Monday, May 8, 2017
Connecticut Feels Effect of Drop in Super-Rich Tax Payments
The Aetna insurance company has been based
in Hartford, Conn., since 1853, but this week it said it is
looking to move to another state....
Gov. Malloy has spent two terms treating
business as a bottomless well of cash to redistribute to
public unions. Now that his state is losing millionaires and
businesses, he has seen the light. But the price of his
dereliction will be steep....
The Governor—a slow learner—seems finally to
have accepted that raising taxes on the wealthy is a dead
fiscal end. Democrats are now proposing higher taxes on
tobacco, expanding casinos and eliminating some tax breaks,
though they don’t want to touch an exemption for teacher
pensions. The state teachers union warns that axing the
exemption would impel retired teachers to relocate. A
quarter of pension checks are currently sent out of
state....
He’s suggested increasing municipal pension
contributions and cutting state-revenue sharing, both of
which could drive up property taxes and imperil insolvent
cities like Hartford. Mr. Malloy’s budget includes a $50
million bailout for Hartford to prevent bankruptcy, which
might occur in any case if Aetna—its fourth largest
taxpayer—leaves....
Maybe Democrats should follow Jerry
Seinfeld’s advice to George Costanza and do the opposite of
the instinct that has brought the state so low: Cut taxes.
The Wall Street Journal
Saturday, June 3, 2017
Connecticut’s Tax Comeuppance
With the rich tapped out, the state may resort to Puerto
Rico bonds
With sluggish revenues testing Gov. Charlie
Baker's ability to balance investment needs with fiscal
prudence, one of the country's largest credit rating
agencies on Friday downgraded the state's bond rating with
an admonishment for its approach to savings.
S&P Global Ratings lowered its rating for
Massachusetts bonds to AA from AA+ in a move that could
impact borrowing costs for the state and serves as a black
eye for the Baker administration and budget officials in the
Legislature who pride themselves on budget management.
"The downgrade reflects what we view as the
commonwealth's failure to follow through on rebuilding its
reserves as stipulated through its own fiscal policies aimed
at mitigating the state's propensity for revenue
volatility," S&P Global Ratings credit analyst John Sugden
said.
That volatility has led to a $439 million
gap between the amount of revenue state officials wrote into
the revenue column for the fiscal 2017 budget and the amount
that has actually arrived in the state's coffers.
Though budget officials have paid lip
service to building reserves during good economic times and
made regular deposits to the $1.2 billion "rainy day" fund,
the administration and the Legislature have also used excess
capital gains taxes in recent years that would otherwise be
earmarked for the reserve fund to support spending.
State House News Service
Friday, June 9, 2017
Mass. bond rating downgraded, S&P cites reserve policies
A national bond-rating agency has downgraded
its measure of Massachusetts’ creditworthiness for the first
time in almost 30 years, a decision that has the potential
to tarnish Governor Charlie Baker’s image as a good steward
of the state’s finances....
Baker has repeatedly proposed and signed
budgets that divert money meant for the emergency savings
account. State representatives and senators in the
Democratic-controlled Legislature have the final say over
how funds are appropriated and have agreed to those
budgetary tactics.
In an interview, Baker said the downgrade is
“a wake-up call.”...
The rainy day fund is supposed to be a
bulwark against extreme cuts to state services when tax
revenue falters. But to paper over state budget gaps, policy
makers — including Baker and his predecessor, Democrat Deval
Patrick — took billions meant for the fund in recent years,
even during relatively good economic times with tax revenue
increasing.
That money was, of course, spent on state
services that otherwise would not have been funded. But it
means the cash reserves won’t be there when the economy
inevitably turns south. That’s extremely dangerous, fiscal
watchdogs say.
In the summer of 2007, just months before
the Great Recession began, the state’s rainy day fund had a
little more than $2.3 billion. Now, with economists warning
a new economic downturn could be coming, the fund is at $1.3
billion.
The Boston Globe
Saturday, June 10, 2017
State’s bond rating downgraded despite growth
On Wednesday, the Massachusetts legislature
is scheduled to hold a constitutional convention on a
so-called “millionaire’s tax.” The “Fair Share Amendment”
would levy a 4 percent surtax on income above $1 million.
This surtax would be in addition to the 5.1 percent state
income tax, making the total income tax burden for
high-income residents 9.1 percent....
The tax also includes a marriage penalty, as
the $1 million threshold doesn’t change with respect to
filing status; the Massachusetts Department of Revenue (DOR)
estimates that approximately 86 percent of the affected
taxpayers would be married couples.
If legislators approve the amendment, it
will be on the ballot for Massachusetts voters in 2018.
Should the amendment be ratified, the legislature would have
no ability to adjust the proposal due to Massachusetts’s
constitutional requirements. The earliest the proposal could
be modified would be 2023, illustrating the risk to
policymaking via a state’s constitution.
The legality of the proposal is ambiguous,
principally due to the appropriation of future revenue. The
Massachusetts constitution prohibits ballot initiatives from
appropriating funding. Since the Fair Share Amendment
designates the new tax revenue for transportation and
education, its constitutionality is debatable.
Legal questions aside, the amendment has
serious economic implications. Notably, the bill does not
specify any provisions for pass-through businesses. Such
businesses report their income on an owner or shareholder’s
tax filing, rather than on a separate corporate filing.
Around 10,000 Massachusetts filers in 2013 listed income
from partnerships or S corporations that was above $1
million, according to the latest available IRS data. These
filers represented 5.9 percent of pass-through businesses,
but accounted for 63 percent of net pass-through income.
The 9.1 percent top rate would expose
Massachusetts pass-through businesses to the fifth highest
rate in the nation. This diminishes the desirability of
Massachusetts as a location for small businesses and
start-ups, which are a core tenet of the state’s economic
strength. Small businesses account for 97.8 percent of all
employers in Massachusetts, and employ about half the
state’s total workforce. Though small businesses do not have
to be pass-through entities, the potential impact on those
that are is worrisome.
In 2016, Illinois pondered a similar tax
increase that would have levied an 11.25 percent top rate on
pass-through businesses. Analysis from the Illinois
Department of Revenue showed that imposition of the rate
would cost the state 20,000 jobs and $1.9 billion in GDP
over its first four years. Additionally, 43,000 individuals
were projected to move out of Illinois as a result of the
tax increase. The legislative session ended before action
was taken on the measure....
Even if the Fair Share Amendment is better
targeted to affect only wealthy individuals, there would
still be economic repercussions for Massachusetts. The steep
combined tax rate may cause high earners to migrate to other
states.
If the amendment is ratified, neighboring
states would offer significantly lower top rates to the
wealthiest residents. Rhode Island charges a top rate of
5.99 percent, Connecticut charges 6.99 percent, and New
Hampshire charges 8.97 percent
[sic — has no income tax].
All are within two hours of Boston, where the majority of
Massachusetts’s top earners reside.
Tax Foundation
Washington, DC
Tuesday, June 13, 2017
Millionaire’s Tax Would Revive “Taxachusetts”
Though the state is dealing with the "big
problem" of sluggish tax revenue collections, freezing the
state's slowing falling income tax rate is not an idea under
serious consideration, Senate President Stanley Rosenberg
said Thursday.
"I don't think we're seriously considering
that," Rosenberg said on Boston Herald Radio. He added, "I
don't see that happening at this time."
Two lawmakers made a pitch this week for a
bill (H1618) to hold the income tax rate at 5.1 percent
rather than allowing it to drop to 5.05 percent next year as
expected and then to 5 percent as economic conditions
allow....
Rosenberg said Thursday that the Legislature
is prepared if the economic triggers indeed call for the
reduction and suggested that only the economy could stop it.
"We already paid for it in the budget that
passed the House and passed the Senate, so in the conference
committee that money is sitting there," he said. "That is an
automatic reduction if we hit certain economic benchmarks.
If we hit it, the money's there to pay for it. If we don't
hit those economic benchmarks then it doesn't go down."
State House News Service
Thursday, June 8, 2017
Freezing income tax rate not getting serious consideration,
Rosenberg says
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Chip Ford's CLT
Commentary
There are enough news reports to keep the reader busy, and
the vote on the graduated income tax is coming up in
minutes, so I'll keep this as brief as possible. My
unavoidable observations from these news reports follow.
First the good news: It appears that halting our
rollback of the income tax rate is dead on arrival. "I
don't think we're seriously considering that," Senate
President Stan Rosenberg said on Boston Herald Radio. He
added, "I don't see that happening at this time." It
looks like CLT's testimony before the Revenue Committee and
your phone calls had the desired effect.
The Boston Globe noted in its report today ("Will
‘millionaires’ tax?’ appear on 2018 ballot?"): "The
amendment would scrap the state’s flat income tax rate of
5.1 percent and create a two-tiered system. Starting
in 2019, all earnings over $1 million would be taxed at a
rate 4 percentage points higher."
That's the first time I've seen the effect of the so-called
"Millionaire's Tax" properly defined —
as a graduated income tax that would obviate the state's
historic flat tax. We're making progress!
If we need more evidence that our state government has an
insatiable spending problem, not a lack of revenue from us,
consider these observations:
"Though budget officials
have paid lip service to building reserves during
good economic times and made regular deposits to the
$1.2 billion "rainy day" fund, the administration
and the Legislature have also used excess capital
gains taxes in recent years that would otherwise be
earmarked for the reserve fund to support spending."
(State House News Service, Friday, June 9, 2017 -
"Mass. bond rating downgraded, S&P cites reserve
policies")
"That money was, of course, spent on state services
that otherwise would not have been funded. But it
means the cash reserves won’t be there when the
economy inevitably turns south." (The Boston Globe,
Saturday, June 10, 2017 - "State’s bond rating
downgraded despite growth")
"The past four budgets
demonstrate why these funds may never be
appropriated for education or transportation, even
if legislators support these causes," MTF wrote.
"Confronted by budget gaps of $1 billion or more,
lawmakers have used all available funds to close
shortfalls every year since FY 2015." (State
House News Service. Tuesday, June 13, 2017 - "Surtax
backers say mobility fears about wealthy are
overstated")
The Takers who are attempting to steamroll this
circumvention of our longstanding tax system will do
anything to have their way. They just lie, then
lie more. The bigger the lie the better:
"Raise Up claimed the text of the proposed amendment
'ensures' the money raised would be spent on
transportation and public education, and said a
provision of the constitution 'already dedicates
revenue from the gas tax and other sources to the
transportation needs.' (State House News Service,
Tuesday, June 13, 2017 - "Surtax backers say
mobility fears about wealthy are overstated")
Reminding legislators and the public of stubborn facts,
we wrote in
yesterday's Memo to the Legislature:
When
the gas tax was increased from 11 to 21 cents in
1990, it generated an additional $120 million in
revenue. All that money was supposed to go to the
highways and bridges. Instead, as
AAA pointed out at the time in a scathing editorial,
only $7.4 million actually went for its intended
purpose.
In that memo yesterday we focused on the cost "soaking
the rich" had for Maryland, and how that state had been
rudely awakened. Today, Connecticut's lessons from
"soaking the rich" need to be highlighted.
"New
figures released last week show tax revenue from the
state's top 100 highest-paying taxpayers declined 45
percent from 2015 to 2016. The drop adds up to a
$200 million revenue loss for the state.... [Kevin
Sullivan, commissioner of the Connecticut Department
of Revenue Services] acknowledged part of revenue
decline can also be attributed to 'a handful' of
wealthy individuals who moved to more tax-friendly
states — an issue frequently raised by legislative
Republicans, who argue Connecticut's tax policies
encourage the state's super-rich to move out."
(Associated Press, Monday, May 8, 2017 -
"Connecticut Feels Effect of Drop in Super-Rich Tax
Payments")
"[Connecticut] Gov. Malloy has spent two terms
treating business as a bottomless well of cash to
redistribute to public unions. Now that his state is
losing millionaires and businesses, he has seen the
light. But the price of his dereliction will be
steep." (The Wall Street Journal, Saturday, June 3,
2017 - "Connecticut’s Tax Comeuppance")
While other states that have already tried this failed
experiment of envy-run-amok are suddenly backpedaling, here
in Taxachusetts our lust-blinded legislators have learned
nothing from demonstrated failure. In their insatiable
appetite for ever more revenue to squander "The Best
Legislature Money Can Buy" rushes headlong, oblivious to
proven disastrous policies.
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Chip Ford
Executive Director |
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The Boston Globe
Wednesday, June 14, 2017
Will ‘millionaires’ tax?’ appear on 2018 ballot?
We’ll find out Wednesday
By Michael Levenson
State lawmakers are expected to vote Wednesday
to place a constitutional amendment on the 2018
ballot that would raise taxes on the rich and
direct the money to transportation and
education.
Approval by the Legislature could potentially
shift the fight over the so-called millionaires’
tax to the courts, where business groups are
working on a legal challenge in hopes of
derailing the measure before it could reach
voters.
If those efforts fail, the amendment could then
head to the ballot, where early polling suggests
it enjoys overwhelming support.
Business groups have argued the tax will hurt
the economy, while labor, religious, and
community groups say it will raise much-needed
revenue to fix crumbling roads and rails and
improve schools.
The amendment would scrap the state’s flat
income tax rate of 5.1 percent and create a
two-tiered system. Starting in 2019, all
earnings over $1 million would be taxed at a
rate 4 percentage points higher.
State officials say about 19,600 people, or 0.5
percent of all filers in Massachusetts, would
pay the higher tax, which would raise about $2
billion annually.
Supporters say the money is needed to make
public higher education more affordable and
ensure the state has a modern, reliable
transportation network.
Business groups argue the money may not
materialize because some wealthy residents will
leave the state rather than pay the higher tax.
They also point to language in the amendment
that they say would allow lawmakers to spend the
revenue on items other than transportation and
education. Business groups have suggested that
this language could be the focus of a legal
challenge.
“This proposal, unfortunately, combines
questionable benefits with an extraordinary
level of risk,” the Massachusetts Taxpayers
Foundation wrote in a withering analysis of the
proposal released Monday.
But Representative Jay Kaufman, a Lexington
Democrat who supports the amendment, said such
warnings are not likely to affect the outcome of
Wednesday’s special joint session of the
Legislature, called a constitutional convention.
“We’ve heard these arguments before,” he said.
He pointed to studies that show that states that
have raised taxes on top earners did not see an
exodus of wealthy residents. And he dismissed
concerns that the amendment’s language would
allow the Legislature to spend the money on
other things, saying the language is clear and
the constitution is binding.
Wednesday’s vote represents one of the last
steps in a lengthy process.
Backers of the tax amendment have already
cleared one threshold by submitting more than
157,000 signatures from Massachusetts voters
last year. The amendment also received 135 votes
— far above the required 50 — at the last
constitutional convention in May 2016.
On Wednesday, backers just need support from 50
lawmakers again to place the amendment on the
2018 ballot. Governor Charlie Baker does not
have to sign the amendment as part of the
process.
If ratified by voters, the amendment would mark
the first change in the Massachusetts
Constitution since the passage in 2000 of a
constitutional amendment that banned voting by
convicted felons in prison.
State House News Service
Monday, June 12, 2017
Income surtax taxes talent, could backfire on
Massachusetts, MTF says
By Michael P. Norton
High-income taxpayers in Massachusetts who have
the flexibility to move out of state would have
"substantial incentive" to do so if an income
surtax is approved, taking their wealth and
major tax contributions with them and causing
the so-called millionaire's tax to backfire on
proponents, according to a new analysis.
The Massachusetts Taxpayers Foundation analysis,
released two days before lawmakers are expected
to vote to place a constitutional amendment on
the 2018 ballot, lays out a case against the
proposal, which proponents say will force
households with incomes above $1 million a year
to pay their "fair share."
The tax burden of those targeted by the plan
would grow from 21 percent to 29 percent of
total annual income taxes, and affected
taxpayers may respond with their feet, the
report says. Calling it a "serious threat to the
fiscal stability and economic well-being of the
Commonwealth," the analysis predicts the surtax
will lead to "confusion and litigation" and
undercut efforts to attract capital. The
taxpayers foundation's members include many
large businesses.
"The millionaire's tax does not align with the
state's economic interests because it taxes
talent - Massachusetts' principal competitive
advantage," the analysis says. "The appeal is
easy to understand - it is projected to raise
almost $2 billion per year; does not require
legislators to take a vote on a tax increase;
and targets a small number of wealthy taxpayers.
But as the old adage suggests, if it sounds too
good to be true, it probably is."
In May 2016, Democrats in the Legislature voted
overwhelmingly, 135-57, to advance the citiziens
petition, with proponents arguing state
government needs a revenue infusion to afford
overdue investments in education and
transportation. If adopted, the state would move
away from its uniform income tax rate -
currently 5.1 percent - to a system featuring
two different rates, depending on income.
Wednesday's expected vote is scheduled just days
after Standard & Poor's Global Ratings
downgraded its rating of the state's
creditworthiness and as Gov. Charlie Baker and
Democratic legislative leaders struggle with
major budget difficulties stemming from weak
growth in overall state tax collections.
Among other things, the analysis predicts
budgeting realities on Beacon Hill will prompt
lawmakers to take steps to use revenues from the
tax increase to plug budget holes rather than
dedicating new revenues to transportation and
education, as the amendment is designed to do.
And the analysis claims budget problems will
likely worsen, if there is an outward migration
of high-income taxpayers, because many of the
same people who will be hit with the 4 percent
income surtax account also pay large amounts in
capital gains taxes.
The analysis says that 19,600 tax filers would
be affected by the tax increase, including 900
who are projected to make more than $10 million
annually and would contribute 53 percent of new
tax revenues, or over $1 billion of the
additional $1.9 billion projected from the
surtax. The top 100 earners in the state would
see their income taxes rise from an average of
$5 million to $9.3 million annually.
"If one-third of the 900 tax-filers projected to
make more than $10 million annually were to
relocate, total income tax revenues would drop
by approximately $750 million ($410 million in
taxes from the current rate and $335 million in
projected taxes from the 4 percent rate hike ...
" the analysis said. "Since over 80 percent of
income for this group derives from capital
gains, Schedule E earnings, and interest - with
just 15 percent coming from wages - most
taxpayers would have the motivation and
flexibility to avoid the additional tax burden."
The report faults the state's official estimate
that the new tax could yield $1.6 billion to
$2.2 billion a year because it is based on a
"static" analysis, "meaning it does not consider
or factor in the affected taxpayers' change in
behavior as a result of this tax increase or the
impact on the larger economy."
Another big knock on the surtax, according to
the analysis, is that it would take too long -
several years at a minimum - to change the
policy if it fails to live up to the claims of
its supporters or if it backfires in the ways
predicted by the taxpayers foundation. Laws can
be changed relatively quickly, if necessary, but
the process required to amend the constitution
is a long one.
The report is not silent on possible
alternatives to the income surtax.
"The Legislature could make the state tax
structure more progressive by statutorily
raising the income tax rate and the amount of
personal exemptions or by lowering the sales tax
rate to reduce the burden on lower income
earners," according to the analysis, which was
distributed to lawmakers Monday morning. "These
changes would make the state's tax code more
progressive without putting the economy at risk
and could be easily amended by the legislature
as fiscal or economic changes dictate."
Rep. Jay Kaufman (D-Lexington), co-chair of the
Legislature's Revenue Committee, said during the
2016 convention that the poorest Massachusetts
households pay 11 percent of their income in
state and local taxes, compared to about 9
percent of middle-income households, and less
than 5 percent for households in the top 1
percent, as measured by income. "We have a
classic regressive tax system," said Kaufman.
The Boston Globe
Tuesday, June 13, 2017
Business-backed group says proposed tax would
chase away top earners
By Michael Levenson
A proposed amendment to the Massachusetts
Constitution that would raise taxes on the rich
poses a serious threat to the state’s fiscal
stability and economic well-being, according to
a scathing analysis released Monday by an
influential business-backed think tank.
The Massachusetts Taxpayers Foundation released
the warning two days before the Legislature
gathers in a constitutional convention, where
lawmakers are expected to vote to place the
so-called millionaire’s tax on the 2018 ballot.
If ratified by voters, the amendment would
impose an additional tax of 4 percent on annual
income of more than $1 million. State officials
say about 19,600 people, or 0.5 percent of all
filers in Massachusetts, would be affected.
Unions and liberal groups argue the proposal
would raise $1.9 billion annually, money that’s
needed to fund improvements in transportation
and education.
But the foundation says the amendment would “tax
talent – Massachusetts’ principal competitive
advantage.”
“The appeal is easy to understand — it is
projected to raise almost $2 billion per year;
does not require legislators to take a vote on a
tax increase; and targets a small number of
wealthy taxpayers,” the foundation says in its
report. “But as the old adage suggests, if it
sounds too good to be true, it probably is.”
The group argues it is unlikely the amendment
would generate $1.9 billion, because some rich
residents would leave Massachusetts rather than
pay higher taxes.
The foundation points in particular to a group
of 900 people who earn more than $10 million
annually, largely from investments. It says they
would have the “motivation and flexibility to
avoid the additional tax burden.”
The foundation also argues that one-quarter of
the $1.9 billion would be generated through
capital gains taxes, which are notoriously
volatile and crater when the economy sours.
Even if the revenue were to materialize, the
foundation says, the money would not necessarily
fund transportation and education, because the
Legislature could decide to spend it on other
things or use it to plug annual budget gaps.
The foundation also warns that if lawmakers
conclude the tax is harming the economy, it
would take four years to change it or repeal it,
because it would require another constitutional
amendment.
Raise Up Massachusetts, the coalition of
community, religious, and labor groups that has
sponsored the amendment, blasted the
foundation’s analysis as “wrong on the law and
wrong on the impact.”
“The millionaires who fund the Massachusetts
Taxpayers Foundation are clearly terrified that
voters are going to ask them to pay their fair
share in taxes, because the foundation is
deliberately trying to mislead legislators and
the public,” the coalition said in a statement.
Raise Up disputed the notion that the money
might not be spent on education and
transportation, saying the amendment leaves no
wiggle room because “the Constitution is binding
on the Legislature.”
The coalition also said studies have shown that
when New Jersey, Oregon, and Maryland raised
taxes on top earners, that did not spark a mass
exodus of wealthy residents.
Raise Up said the foundation’s analysis also
ignores the economic benefits that would flow
from improving the transportation and education
systems.
“What does matter for building our economy is
making sure we have a well-educated workforce
and transportation infrastructure that works,
and we do that by investing,” said Noah Berger,
president of the left-leaning Massachusetts
Budget and Policy Center, which has sided with
Raise Up Massachusetts in the fight over the
proposed tax.
The taxpayers foundation is widely respected on
Beacon Hill, and its board includes executives
of major corporations such as Vertex
Pharmaceuticals, IBM, and Walmart.
But the group acknowledged its concerns are not
likely to shift the outcome of Wednesday’s
constitutional convention. The proposed
amendment needs 50 votes to advance, and
received 135 at the last convention, in May
2016. It must be approved by two constitutional
conventions before voters can cast their
ballots.
Governor Charlie Baker, a Republican, does not
have to sign the measure to advance it to the
ballot. But as he runs for reelection in 2018,
he may have to navigate the swirling political
debate surrounding it.
So far, he has not said if he supports or
opposes the amendment. But he has generally
sounded cool to it, saying the state must live
within its means.
“Governor Baker does not support tax increases
on our hard-working families, and was pleased to
sign a balanced budget last year that reflects
the administration’s priorities to create better
communities, schools and jobs with no new
taxes,” his spokeswoman said in a statement
Monday.
Early polling suggests the amendment enjoys
broad public support. A May 2016 survey by
Suffolk University and The Boston Globe found 70
percent of voters supported the proposal.
State House News Service
Tuesday, June 13, 2017
Surtax backers say mobility fears about wealthy
are overstated
By Andy Metzger
Some Massachusetts millionaires are "clearly
terrified" that voters will raise their income
taxes, but even if the proposal takes effect the
top earners won't flee the state en masse,
according to a liberal group pressing for the
tax plan's passage in the face of new concerns
raised by a business group.
The House and Senate voted 135-57 last year to
advance a proposed constitutional amendment
adding an income surtax on the state's highest
earners and the branches meeting in joint
session Wednesday could pass it again to put the
matter before voters on the 2018 ballot.
The Massachusetts Taxpayers Foundation (MTF), a
business-backed public policy group, warned
Monday that the proposed 4 percent surtax on
incomes over $1 million could lead to a
migration by millionaires from Massachusetts,
endangering the state's finances and economy.
"The millionaires who fund the Massachusetts
Taxpayers Foundation are clearly terrified that
voters are going to ask them to pay their fair
share in taxes, because the Foundation is
deliberately trying to mislead legislators and
the public," Raise Up Massachusetts said in a
statement Monday.
Raise Up and the left-leaning Massachusetts
Budget and Policy Center argued that
millionaires are more firmly rooted into their
communities than those with more modest incomes.
Citing research from Stanford University and
U.S. Treasury economists, the policy center
wrote that millionaires are more likely to be
married, have children and own a business, all
of which correlate to staying put.
According to the policy center, 2.4 percent of
millionaires - or about 12,000 households - move
to a different state each year while among the
overall population that rate is 2.9 percent.
While all Massachusetts taxpayers now pay a flat
rate of 5.1 percent of their salaries to the
state, New Hampshire has no income tax on wages.
A Raise Up spokesman said a millionaire's
residency is primarily determined by proximity
to work and family and secondarily influenced by
housing costs and climate, with tax liability
playing a smaller role in decision-making. The
advocacy organization called it a "disproven
myth" that millionaires would leave
Massachusetts because of the tax.
MTF reported that out of the 19,600 tax filers
who would be subjected to the surtax, 900 earn
more than $10 million per year, accounting for
53 percent of the projected $1.9 billion in
revenues from the proposed tax. The group said
the plan "taxes talent - Massachusetts'
principal competitive advantage."
Eileen McAnneny, the president of MTF, said the
proposed tax would have the greatest effect on a
small group of people who have a high range of
options - such as second homes where they might
claim residency without ever needing a moving
truck - and professionals who advise them on how
to avoid tax liability.
While MTF has cautioned that applying a new tax
to top earners could destabilize state finances
if high-income households decide to leave the
state in significant numbers, the budget and
policy center estimated that the state and
municipalities would only lose $24 million in
tax revenue while the higher tax would net about
$1.9 billion.
A coalition of unions, faith groups and
community organizations, Raise Up Massachusetts
has notched some major victories in the past few
years, encouraging lawmakers to increase the
minimum wage and backing a successful ballot law
guaranteeing workers sick time. Raise Up
collected more than enough signatures to put the
surtax proposal before the Legislature, where it
has been greeted warmly by most Democrats.
Harris Gruman, executive director of the SEIU
Massachusetts State Council, told a group at the
State House two years ago that polling and focus
groups showed that taxing incomes over $1
million was much more popular than taxing
incomes over $300,000.
The proposal, which would become part of the
state constitution if voters pass it next year,
is designed to devote the revenues towards
education and transportation, though opponents
say policymakers would play a shell game with
the new funds, sending extra money to budget
priorities without constraint.
While declining to take a firm stance on the
proposal, Gov. Charlie Baker said some have
already spent the anticipated tax dollars "six
ways to Sunday."
"The past four budgets demonstrate why these
funds may never be appropriated for education or
transportation, even if legislators support
these causes," MTF wrote. "Confronted by budget
gaps of $1 billion or more, lawmakers have used
all available funds to close shortfalls every
year since FY 2015."
Raise Up claimed the text of the proposed
amendment "ensures" the money raised would be
spent on transportation and public education,
and said a provision of the constitution
"already dedicates revenue from the gas tax and
other sources to the transportation needs."
"Instead of defending a few hundred people whose
incomes exceed $10 million a year, the MTF
should remember that they've advocated for
increased investments in transportation for
years, and realize that now is the time to
support a real solution to our state's lack of
investment," Raise Up wrote.
Associated Press
Monday, May 8, 2017
Connecticut Feels Effect of Drop in Super-Rich
Tax Payments
Connecticut's state budget is feeling the
effects of a decline in income tax payments from
the super-rich.
By Susan Haigh
HARTFORD, Conn. (AP) — Connecticut's coffers are
feeling the pinch of the state's super-rich no
longer paying what they used to in personal
income taxes.
New figures released last week show tax revenue
from the state's top 100 highest-paying
taxpayers declined 45 percent from 2015 to 2016.
The drop adds up to a $200 million revenue loss
for the state.
"When you look at the top 75, top 50 ... this is
a group of wealthy people who are dramatically
less wealthy than they were before," said Kevin
Sullivan, commissioner of the Connecticut
Department of Revenue Services. "These folks,
for a number of reasons, are either not
realizing as much income or don't have as much
income."
This latest drop in tax revenues paid by the
wealthy, a problem for the past several years,
has exacerbated Connecticut's current budget
woes. The projected deficit for the new fiscal
year beginning July 1 has now jumped from about
$1.7 billion to $2.3 billion, while the deficit
predicted for the second year of the state's
two-year budget is now about $2.7 billion. The
state's main spending account, the general fund,
is roughly about $18 billion annually.
Lawmakers and the governor have already
discussed the possibility of making deep cuts
throughout state government, including to state
colleges and universities and social services.
Meanwhile, there's a threat of about 4,000
layoffs if a $700 million labor concession deal
isn't reached with state employees. Lawmakers
say these latest revenue figures make that
agreement even more crucial.
Some of the revenue hit is being blamed on
changes affecting hedge funds, an important
industry for Connecticut. Sullivan noted how
several international hedge funds have recently
failed, resulting in "significant retrenchment"
from investors. That drop in tolerance for risk
brings smaller margins and ultimately less
personal income for the state to tax, he added.
Sullivan acknowledged part of revenue decline
can also be attributed to "a handful" of wealthy
individuals who moved to more tax-friendly
states — an issue frequently raised by
legislative Republicans, who argue Connecticut's
tax policies encourage the state's super-rich to
move out.
In contrast with some of his fellow Democrats,
Gov. Dannel P. Malloy has urged the General
Assembly to steer clear of legislation that
targets the state's wealthiest taxpayers,
including a proposed 19.5 percent tax on hedge
funds. The "mere discussion of it in our state,
year after year," he said, is harmful to
Connecticut's commerce and reputation.
"This is an important industry. It produces a
tremendous amount of revenue to our state," he
said. "If you blithely throw around the idea
you're going to propose a 19.5 percent tax on an
industry that is responsible for a
disproportionate share of our state personal
income tax revenue, then don't be surprised when
people start to explore other opportunities."
New Jersey experienced such a problem in 2016
when a hedge-fund billionaire declared himself a
resident of Florida. David Tepper also moved the
hedge fund's official headquarters to Florida,
resulting in a total estimated revenue loss of
hundreds of millions of dollars to the state.
Malloy's warnings follow a 2016 report to
Connecticut's Commission for Economic
Competitiveness that determined the industries
adding the most jobs in the state are paying an
average wage of $54,018 a year. Meanwhile,
industries with shrinking employment in
Connecticut pay an average wage of $75,246. The
same report also found Connecticut is losing
young and educated people to other states.
But Malloy said he doesn't foresee Connecticut
losing its status as a wealthy state any time
soon. Recent census data show Connecticut still
has the highest per capita income in the nation.
Malloy is optimistic about job growth in the
state's aerospace and defense industries,
including Electric Boat, Sikorsky Aircraft and
Pratt & Whitney.
While those jobs don't produce "the
extraordinary wealth" associated with hedge-fund
billionaires, he said, they will supplement
Connecticut's large base of well-paying jobs in
advanced manufacturing, bioscience, college
education and financial services support work.
But those jobs aren't expected to generate the
income tax needed to help fill Connecticut's
current revenue hole. Much of the anticipated
employment growth is years away. For example, EB,
which currently has more than 15,000 employees
at its Connecticut and Rhode Island facilities,
hopes to grow its employment base to 18,000 by
2030.
The Wall Street Journal
Saturday, June 3, 2017
OPINION REVIEW & OUTLOOK
Connecticut’s Tax Comeuppance
With the rich tapped out, the state may resort
to Puerto Rico bonds.
The Aetna insurance company has been based in
Hartford, Conn., since 1853, but this week it
said it is looking to move to another state.
Governor Dannel Malloy has pledged to match
other states’ financial incentives, but taxpayer
money can’t buy fiscal certainty and a less
destructive business climate. That’s the real
problem in Connecticut, which saw GE vamoose to
Boston last year and which even Mr. Malloy now
seems to recognize.
“As a huge Connecticut employer and a pillar of
the insurance industry, it must be infuriating
to feel like you must fight your home state
policymakers who seem blind to the future,” Mr.
Malloy wrote in a May 15 letter to Aetna CEO
Mark Bertolini. “The lack of respect afforded
Aetna as an important and innovative economic
engine of Connecticut bewilders me.”
Now he tells us. Gov. Malloy has spent two terms
treating business as a bottomless well of cash
to redistribute to public unions. Now that his
state is losing millionaires and businesses, he
has seen the light. But the price of his
dereliction will be steep.
Last month the state Office of Fiscal Analysis
reduced its two-year revenue forecast by $1.46
billion. Since January the agency has downgraded
income-tax revenue for 2017 and 2018 by $1.1
billion (6%). Sales- and corporate-tax revenue
are projected to fall by $385 million (9%) and
$67 million (7%), respectively, this year.
Pension contributions, which have doubled since
2010, will increase by a third over the next two
years. The result: a $5.1 billion deficit and
three recent credit downgrades.
According to the fiscal analyst, income-tax
collections declined this year for the first
time since the recession due to lower earnings
at the top. Many wealthy residents decamped for
lower-tax states after Mr. Malloy and his
Republican predecessor Jodi Rell raised the top
individual rate on more than $500,000 of income
to 6.99% from 5%. In the past five years 27,400
Connecticut residents, including Ms. Rell, have
moved to no-income-tax Florida, and seven of the
state’s eight counties have lost population
since 2010. Population flight has depressed
economic growth—Connecticut’s real GDP has
shrunk by 0.1% since 2010—as well as home values
and sales-tax revenues.
Corporate revenues also took a hit after General
Electric relocated to Boston. Mr. Malloy then
offered tax breaks to hedge funds and companies
to stay in Connecticut, which has further eroded
revenue.
The Governor—a slow learner—seems finally to
have accepted that raising taxes on the wealthy
is a dead fiscal end. Democrats are now
proposing higher taxes on tobacco, expanding
casinos and eliminating some tax breaks, though
they don’t want to touch an exemption for
teacher pensions. The state teachers union warns
that axing the exemption would impel retired
teachers to relocate. A quarter of pension
checks are currently sent out of state.
Mr. Malloy is also seeking $1.6 billion in
concessions from unions, which would be easier
to achieve if collective bargaining weren’t
mandated by law. He’s suggested increasing
municipal pension contributions and cutting
state-revenue sharing, both of which could drive
up property taxes and imperil insolvent cities
like Hartford. Mr. Malloy’s budget includes a
$50 million bailout for Hartford to prevent
bankruptcy, which might occur in any case if
Aetna—its fourth largest taxpayer—leaves.
The state treasurer has advocated “credit bonds”
securitized by income-tax revenues to reduce the
state’s borrowing costs. Investors beware:
Puerto Rico tried something similar with its
sales tax, and bondholders might not get back a
penny. Maybe Democrats should follow Jerry
Seinfeld’s advice to George Costanza and do the
opposite of the instinct that has brought the
state so low: Cut taxes.
State House News Service
Friday, June 9, 2017
Mass. bond rating downgraded, S&P cites reserve
policies
By Matt Murphy
With sluggish revenues testing Gov. Charlie
Baker's ability to balance investment needs with
fiscal prudence, one of the country's largest
credit rating agencies on Friday downgraded the
state's bond rating with an admonishment for its
approach to savings.
S&P Global Ratings lowered its rating for
Massachusetts bonds to AA from AA+ in a move
that could impact borrowing costs for the state
and serves as a black eye for the Baker
administration and budget officials in the
Legislature who pride themselves on budget
management.
"The downgrade reflects what we view as the
commonwealth's failure to follow through on
rebuilding its reserves as stipulated through
its own fiscal policies aimed at mitigating the
state's propensity for revenue volatility," S&P
Global Ratings credit analyst John Sugden said.
That volatility has led to a $439 million gap
between the amount of revenue state officials
wrote into the revenue column for the fiscal
2017 budget and the amount that has actually
arrived in the state's coffers.
Though budget officials have paid lip service to
building reserves during good economic times and
made regular deposits to the $1.2 billion "rainy
day" fund, the administration and the
Legislature have also used excess capital gains
taxes in recent years that would otherwise be
earmarked for the reserve fund to support
spending.
"Today's downgrade of the state's bond rating is
unfortunate, but we are not surprised,"
Treasurer Deborah Goldberg said in a statement.
"With this news, we must continue to work with
the Governor and the Legislature to rebuild our
state's stabilization fund and reaffirm our
commitment to fiscal policies that will ensure
an upgrade in the future."
Moody's and Fitch, two other major credit rating
agencies, recently reaffirmed Massachusetts'
ratings at AA 1 and AA+, respectively, with a
stable outlook. And S&P said it believed that
the state's "strong economic growth and
proactive management" will allow it to navigate
through mid-year revenue shortfalls with "some
continued use of one-time measures to balance
the budget."
Baker, in a statement responding to the
downgrade, accentuated the positive.
"While this rating affirms we still have work to
do, we have made progress to pay down long-term
obligations like our unfunded pension liability
and ended the previous practice of drawing down
on reserves to pay for operating expenses, all
without raising taxes," Baker said. "As this
year's budget is debated by the Legislature, we
strongly encourage them to consider our proposal
for stabilization fund deposits to grow reserves
more rapidly and look forward to future
collaboration to continue our progress to put
the Commonwealth on strong fiscal footing."
According to the administration, the
stabilization fund has grown 20 percent since
the governor took office, including the reversal
of a $140 million withdrawal authorized in
fiscal 2015 by the previous administration.
The governor has proposed a $98 million deposit
into the "rainy day" at the start of fiscal
2018, and a new process for building the
reserves that would include a second deposit at
the end of the fiscal year equal to 50 percent
of all tax revenue exceeding projections.
S&P Global Ratings said that the 2011 upgrade to
the state's credit rating to AA+ was
"predicated" on policies adopted to ensure that
the stabilization fund could be rebuilt after
being drained during the last recession. The
rating agency, however, attached a negative
outlook to the state's creditworthiness in
November 2015.
"Despite above-national average economic growth
through a prolonged period of economic
expansion, the state has not demonstrated a
commitment to its adopted budget reserve
policies, upon which our 2011 upgrade to 'AA+'
was predicated, in part. We therefore view it as
a missed opportunity that the state has opted
against building its reserve according to its
policies and leaves it on a course to experience
greater fiscal stress in the event of an
economic downturn or if federal funding were
capped or trimmed in a material way," the agency
wrote.
In a phone interview, a Treasury official said
she hoped the downgrade would not negatively
affect the terms of a planned borrowing on June
20. Treasury officials plan to issue $500
million in new bonds and $285 million in
refunding bonds, with which they hope to achieve
$25 million in long-term savings.
Based on conversations with banking industry
officials, Assistant Treasurer Sue Perez said
there is a lot of money in the market to be
invested and high demand for high-credit bonds.
"We don't anticipate a huge impact on the
borrowing and we hope to not see any," said
Perez.
The downgrade, however, comes with a political
cost as well.
Jay Gonzalez, a Democratic candidate for
governor and former budget secretary under Gov.
Deval Patrick, pointed to the action by Standard
and Poor's as proof that Baker is "failing us."
"His mismanagement is now going to cost
taxpayers millions of dollars. We can and must
do better. Under my leadership during the Great
Recession, Massachusetts achieved the highest
bond ratings in state history, and we grew the
rainy day fund by close to $1 billion for a
total balance that was hundreds of millions of
dollars more than it is today under Governor
Baker. Governor Baker owes taxpayers an
explanation and a plan for getting us out of the
mess he created," Gonzalez said in a statement.
—Michael Norton
contributed reporting
The Boston Globe
Saturday, June 10, 2017
State’s bond rating downgraded despite growth
By Joshua Miller
A national bond-rating agency has downgraded its
measure of Massachusetts’ creditworthiness for
the first time in almost 30 years, a decision
that has the potential to tarnish Governor
Charlie Baker’s image as a good steward of the
state’s finances.
Despite Massachusetts’ solid growth, S&P Global
Ratings said Friday it is lowering the state’s
rating one notch, to the third-highest tier, AA,
because Beacon Hill leaders have failed to
replenish the state’s rainy day fund as
promised.
“Despite above-national average economic growth
through a prolonged period of economic
expansion, the state has not demonstrated a
commitment to its adopted budget reserve
policies,” the rating agency wrote.
The news may not affect how much it will cost
for the state to borrow money, Treasury
officials say. The two other top bond-rating
agencies affirmed the state’s
second-from-highest rating last week, and
Massachusetts remains in better fiscal shape
than many states.
But the decision could be politically damaging
to Baker, who has billed himself as a leader who
knows how to keep the state’s fiscal ship on
course.The Republican, a former state budget
chief, won the corner office in 2014 pledging to
be a careful custodian of taxpayer dollars and
calling himself “a guy who is pretty facile with
math.”
Baker has repeatedly proposed and signed budgets
that divert money meant for the emergency
savings account. State representatives and
senators in the Democratic-controlled
Legislature have the final say over how funds
are appropriated and have agreed to those
budgetary tactics.
In an interview, Baker said the downgrade is “a
wake-up call.”
S&P warned the state in 2015 about its dwindling
rainy day fund, putting Massachusetts on notice
that its bond rating could be knocked down. But
Baker and state lawmakers did not aggressively
attempt to rebuild the savings account in the
time since. Instead they diverted money meant
for it into the operating budget.
Revenue from capital gains taxes — levies on
investment profits — over a certain threshold
are supposed be socked away in the savings
account under state law. But Beacon Hill leaders
have instead used that money to pay for the
costs of everyday government.
Diverting money from the rainy day fund is, “a
problem because there is volatility in [tax]
revenues and the idea is: in periods of strong
economic growth, you should prepare yourself for
a downturn,” said John A. Sugden, S&P’s primary
credit analyst for Massachusetts.
Eileen McAnneny, president of the
business-backed Massachusetts Taxpayers
Foundation, echoed that sentiment, saying the
state’s “inability to follow its own plan to
rebuild reserves leaves the state ill-equipped
to manage the next recession.”
The rainy day fund is supposed to be a bulwark
against extreme cuts to state services when tax
revenue falters. But to paper over state budget
gaps, policy makers — including Baker and his
predecessor, Democrat Deval Patrick — took
billions meant for the fund in recent years,
even during relatively good economic times with
tax revenue increasing.
That money was, of course, spent on state
services that otherwise would not have been
funded. But it means the cash reserves won’t be
there when the economy inevitably turns south.
That’s extremely dangerous, fiscal watchdogs
say.
In the summer of 2007, just months before the
Great Recession began, the state’s rainy day
fund had a little more than $2.3 billion. Now,
with economists warning a new economic downturn
could be coming, the fund is at $1.3 billion.
While the rainy day balance declined by about a
third in the final years of Patrick’s tenure, it
has rebounded modestly under Baker, going up
about 15 percent since he took office in
January, 2015, according to data from the state
comptroller.
Patrick, who led the state for eight years,
including during the Great Recession, saw bond
rating increases during his watch.
The last time one of the big three bond-rating
firms — S&P, Moody’s Investors Service, and
Fitch — downgraded Massachusetts’ credit rating
was March 1990, according to the office of
Treasurer Deborah B. Goldberg, which oversees
bond sales.
In an interview, Baker underscored that the
state’s bond rating with Moody’s and Fitch
remains the second-from-highest, and that he
does not expect the S&P rating change to hurt
the state’s ability to borrow money, nor
increase how much it will cost.
“People will continue to enthusiastically
purchase our bonds,” he said.
Asked whether the downgrade reflects poorly on
him, Baker said, “I think it reflects a trend
that they saw ever since they gave us the
upgrade as a Commonwealth in 2011, which was
that the money they expected to move into the
stabilization fund wasn’t going into it.”
Asked whether he takes some responsibility for
the credit downgrade Friday, Baker replied, “Of
course, yeah, sure, absolutely. Look, they made
clear to us in April of 2015 that they were
concerned about our stabilization fund balance
and the fact that the state hadn’t been putting
money into it.”
He said, however, the downgrade by S&P “is not
remotely comparable to what happened in 1990.”
Then the state was on a much more wobbly
financial footing and had much worse bond
ratings. On Friday, S&P emphasized the state’s
many fiscal strengths including “swift action”
from policy makers when a budget gap emerges.
But, Baker, sitting in his ceremonial office
that dates to 1798, acknowledged “it’s a wake-up
call” to regularly put more cash away in the
fund.
He said he hoped the Legislature would adopt
some version of a proposal he made in January to
set aside some money for the savings account
before each fiscal year begins.
A spokesman for Senate President Stanley C.
Rosenberg declined to comment.
House Speaker Robert A. DeLeo said his chamber
has prioritized paying down the state’s big
pension obligations, while also making deposits
into the rainy day fund.
“We believe Standard & Poor’s decision overlooks
the significant importance of balancing these
two responsibilities,” he said.
In a statement, Goldberg, the state treasurer
and a proponent of beefing up the fund, said the
state must rebuild the rainy day account and
“reaffirm our commitment to fiscal policies that
will ensure an upgrade in the future.”
In recent days, two of the Democrats running for
governor, Mayor Setti Warren of Newton and Jay
Gonzalez, a former state budget chief, have
knocked Baker over the budget.
With the S&P news, that criticism ramped up
Friday, and Gonzalez said, “Governor Baker is
failing us.”
Warren, for his part, said there has been much
talk of Baker’s “reputation for fiscal prudence,
but now a respected, nonpartisan financial
rating agency is telling us that the emperor has
no clothes.”
Tax Foundation
1325 G St., NW, Suite 950
Washington, DC 20005
Tuesday, June 13, 2017
Millionaire’s Tax Would Revive “Taxachusetts”
By Kari Jahnsen
On Wednesday, the Massachusetts legislature is
scheduled to hold a constitutional convention on
a so-called “millionaire’s tax.” The “Fair Share
Amendment” would levy a 4 percent surtax on
income above $1 million. This surtax would be in
addition to the 5.1 percent state income tax,
making the total income tax burden for
high-income residents 9.1 percent.
The Massachusetts Department of Revenue (DOR)
estimates that the surtax would bring in almost
$2 billion in additional revenue annually, which
the amendment would direct towards
transportation and education funding. That
revenue would be raised from taxing only 19,600
taxpayers, representing 0.5 percent of all
filers. Of those taxpayers, the wealthiest 900
would pay 53 percent of the new tax revenues.
The tax also includes a marriage penalty, as the
$1 million threshold doesn’t change with respect
to filing status; the DOR estimates that
approximately 86 percent of the affected
taxpayers would be married couples.
If legislators approve the amendment, it will be
on the ballot for Massachusetts voters in 2018.
Should the amendment be ratified, the
legislature would have no ability to adjust the
proposal due to Massachusetts’s constitutional
requirements. The earliest the proposal could be
modified would be 2023, illustrating the risk to
policymaking via a state’s constitution.
The legality of the proposal is ambiguous,
principally due to the appropriation of future
revenue. The Massachusetts constitution
prohibits ballot initiatives from appropriating
funding. Since the Fair Share Amendment
designates the new tax revenue for
transportation and education, its
constitutionality is debatable.
Legal questions aside, the amendment has serious
economic implications. Notably, the bill does
not specify any provisions for pass-through
businesses. Such businesses report their income
on an owner or shareholder’s tax filing, rather
than on a separate corporate filing. Around
10,000 Massachusetts filers in 2013 listed
income from partnerships or S corporations that
was above $1 million, according to the latest
available IRS data. These filers represented 5.9
percent of pass-through businesses, but
accounted for 63 percent of net pass-through
income.
The 9.1 percent top rate would expose
Massachusetts pass-through businesses to the
fifth highest rate in the nation. This
diminishes the desirability of Massachusetts as
a location for small businesses and start-ups,
which are a core tenet of the state’s economic
strength. Small businesses account for 97.8
percent of all employers in Massachusetts, and
employ about half the state’s total workforce.
Though small businesses do not have to be
pass-through entities, the potential impact on
those that are is worrisome.
In 2016, Illinois pondered a similar tax
increase that would have levied an 11.25 percent
top rate on pass-through businesses. Analysis
from the Illinois Department of Revenue showed
that imposition of the rate would cost the state
20,000 jobs and $1.9 billion in GDP over its
first four years. Additionally, 43,000
individuals were projected to move out of
Illinois as a result of the tax increase. The
legislative session ended before action was
taken on the measure.
Even if the Fair Share Amendment is better
targeted to affect only wealthy individuals,
there would still be economic repercussions for
Massachusetts. The steep combined tax rate may
cause high earners to migrate to other states.
If the amendment is ratified, neighboring states
would offer significantly lower top rates to the
wealthiest residents. Rhode Island charges a top
rate of 5.99 percent, Connecticut charges 6.99
percent, and New Hampshire charges 8.97 percent
[sic — has no
income tax]. All are within two hours of
Boston, where the majority of Massachusetts’s
top earners reside.
Several studies have attempted to analyze the
impacts of state income taxes on wealth
migration. While many found that tax hikes did
not prompt a significant departure of
millionaires, the context of these studies is
arguably quite different. The rate increases in
these cases were not nearly as large as
Massachusetts’s proposed 4 percent surtax, which
represents a 78 percent rate increase for top
earners.
In general, it is sound to assume that a rate
increase will not spur an immediate exodus from
Boston townhomes. Relocation is often costly,
difficult, and frustrating. However, in the
medium term, it becomes far more likely that the
wealthy will relocate to lower-cost areas if the
income tax proves burdensome.
A flight of the rich would have serious
consequences for the state. The top 0.5 percent
of Massachusetts earners accounted for 19
percent of total taxable income in 2013. While
the state might increase revenue in the short
run, losing these earners would greatly diminish
revenue stability. Just look to New Jersey: the
departure of one high net-income individual
caused severe revenue instability.
As the Massachusetts legislature considers the
so-called “Fair Share Amendment” tomorrow,
policymakers would be wise to heed the possible
economic consequences of supporting such a
large, concentrated tax increase.
State House News Service
Thursday, June 8, 2017
Freezing income tax rate not getting serious
consideration, Rosenberg says
By Colin A. Young
Though the state is dealing with the "big
problem" of sluggish tax revenue collections,
freezing the state's slowing falling income tax
rate is not an idea under serious consideration,
Senate President Stanley Rosenberg said
Thursday.
"I don't think we're seriously considering
that," Rosenberg said on Boston Herald Radio. He
added, "I don't see that happening at this
time."
Two lawmakers made a pitch this week for a bill
(H 1618) to hold the income tax rate at 5.1
percent rather than allowing it to drop to 5.05
percent next year as expected and then to 5
percent as economic conditions allow.
State budget officials have expected the rate to
drop from 5.1 percent to 5.05 percent effective
Jan. 1, 2018 -- resulting in $83 million less in
revenue for state government but a slight dose
of tax relief for workers. Whether the rate does
drop depends on a series of triggers, including
a certain level of growth in tax revenues.
Six lawmakers began meeting Monday to reconcile
the House and Senate's roughly $40.3 billion
spending plans for fiscal year 2018. But with
fiscal 2017 tax collections trailing projections
by $439 million with about three weeks left in
the fiscal year, the revenue picture for fiscal
2018 is not as bright as the projections that
lawmakers have relied upon.
The governor's budget office has acknowledged
that revenue projections for fiscal 2018 will
have to be revised downward, and budget writers
could grab the $83 million of revenue for the
fiscal 2018 budget if they reverse their
projection that tax cut triggers will be hit or
otherwise decide that they would like to put off
the tax cut.
Rosenberg said Thursday that the Legislature is
prepared if the economic triggers indeed call
for the reduction and suggested that only the
economy could stop it.
"We already paid for it in the budget that
passed the House and passed the Senate, so in
the conference committee that money is sitting
there," he said. "That is an automatic reduction
if we hit certain economic benchmarks. If we hit
it, the money's there to pay for it. If we don't
hit those economic benchmarks then it doesn't go
down." |
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