Millionaires’ Tax Reality Back at You

In 2015, Raise Up Massachusetts, a grassroots coalition of more than
150 community organizations, faith-based groups, and labor unions,
first proposed “the Fair Share Amendment,” also known as the “Millionaires’ Tax.” Ever since then, the Pioneer Institute, a Massachusetts-based think tank that promotes “the application of free markets” to advance prosperity, has conducted a campaign to defeat the amendment, assuring anyone who would listen that economic disaster was sure to follow if it was approved.

Despite the scare tactics of Pioneer and other fiscally conservative organizations, voters approved the Fair Share Amendment in November 2022. The ballot measure added a 4% income-tax surcharge on taxable income above $1 million to the state’s 5% income tax. Since then, the campaign against the Fair Share Amendment has only intensified. Pioneer has put out study after study dedicated to showing that, contrary to the claims of the supporters of the Amendment, “tax them and they will leave” remains the indisputable truth when it comes to the rich.
But what Pioneer says is indisputable isn’t actually supported by what has happened in Massachusetts, in other states that have increased taxes on the rich, or with state migration trends in general.

Every Which Way but Right

For Pioneer, Massachusetts’ new tax reality is a shocking return to the supposedly tax-heavy policies of old. They report that talk of the Fair Share Amendment, and its adoption earlier this year, has only made things worse: Pioneer claims that “People are leaving at an accelerated pace” and, according to the title of a recent policy brief, “Net Out-Migration of Wealth from Massachusetts Nearly Quintupled from 2012–2021.”

If what Pioneer reports was as bad as it sounds, Massachusetts would be in plenty of trouble. But it’s not. Their sky-is-falling pronouncements rely on a misleading reading of the tax and immigration data.

Here’s what’s wrong with their analysis. To begin with, the Fair Share Amendment only went into effect in 2023. So, Pioneer’s studies have no direct evidence of the effect of its surcharge on the very wealthy. Instead, Pioneer’s authors present data
about Massachusetts’ increased out-migration that they attribute to the state’s high taxes. But the Bay State was among the top 10 highest-tax states from 2011 to 2021 in only one of the three characteristics often used to identify a high-tax state, as reported by the Center on Budget and Policy Priorities (CBPP). The state’s personal income tax revenues relative to personal income were the fourth highest in the country. But the state ranked well below the top 10 highest-tax states with respect to state and local taxes relative to personal income (which are the other two characteristics that the CBPP uses), as well as with respect to its highest personal income tax bracket. However, with the fair share surcharge, the top 9% income tax bracket in Massachusetts will be subject to the sixth highest tax rate in the country in 2023.

Even if you were to accept these limitations, Pioneer’s studies of out-migration remain seriously flawed. Income—not people leaving the state at “an accelerated rate,” as Pioneer claims—is the focus of the Pioneer studies. That makes a difference, especially in the highly unequal Massachusetts economy. Looking at who is leaving the state throws cold water on their contention that high taxes on the rich are causing people to leave the state. For instance, in 2020 more residents between 26 and 35 years old moved out of Massachusetts than any other age group, followed by taxpayers under 26 years old, according to the Massachusetts Taxpayers Foundation. Perhaps there are a few tech moguls and trust fund babies in these age groups, but residents 35 and younger are unlikely to be pushed out of the Bay State by a surcharge on income over $1 million.

Using IRS data to compare the out-migration rates of Massachusetts taxpayers by income group, Kurt Wise, a senior policy analyst at the Massachusetts Budget and Policy Center, a progressive public policy group, found yet more reason to doubt that high taxes are driving residents out of Massachusetts. From 2020 to 2021, the 3.1% out-migration rate of high-income taxpayers with an adjusted gross income (AGI—the IRS income tax category that measures gross income minus deductions) greater than $200,000 was lower than the 3.5% rate of taxpayers with an AGI of less than $200,000.

How different is this picture if we look at the loss of income—AGI, to be exact—as Pioneer does? The right answer is not much. The amount of AGI that left Massachusetts over the last decade did nearly quintuple from $900 million in 2012 to $4.3 billion in 2021. And much of the AGI lost to out-migration was from the departure of households with incomes above $200,000, some 60.1% in 2021. But that’s hardly surprising, given the high levels of inequality in Massachusetts. Only in Massachusetts and Washington, D.C., does half of AGI regularly go to households with an AGI greater than $200,000. In 2021, Massachusetts lost 1.5% of the AGI of these high-income taxpayers to out-migration, a lower rate than the 3.1% out-migration rate of high-income taxpayers from 2020 to 2021, Wise reports.

It is even more of a stretch to attribute the loss of AGI to the prospect of the fair share surcharge that is levied on taxable income above $1 million. No taxpayer with less than $200,000 of AGI would pay the fair share surcharge, nor would most taxpayers with an AGI of more than $200,000. In 2019, only two-fifths (39.8%) of taxpayers with an AGI above $200,000 had an income over $1 million, which would be subject to the surcharge.
On top of that, Pioneer insists that the Fair Share Amendment is deceptively labeled. After all, the richest 1% of Massachusetts taxpayers paid one-quarter of the state’s income taxes, as well as one-quarter of the state’s total taxes. How could it be fair to make them pay yet more taxes?

But those numbers are no measure of tax fairness. A taxpayer’s relative tax burden is how to accurately measure tax fairness. That is measured by what economists call “effective tax rates”—how much a taxpayer pays in taxes as a share of their income. And in Massachusetts, like most states, rich people pay more taxes than poor or middle-income taxpayers, but their tax payments are a smaller share of their income. For instance, the richest 1% of Massachusetts taxpayers paid 6.5% of their income in state and local taxes in 2018, according to the latest data available from the Institute for Tax Policy. But the other 99% of taxpayers had a higher effective tax rate. On average 9.1% of their income went to pay state and local taxes.

In 2023, most of the top 1%, all of whom have an income more than $903,000, will pay the fair share surcharge on some of their income. But with an average income of $2.4 billion, the 4% surcharge on income over $1 million will apply to at most three-fifths (58.9%) of the income of the top 1% in 2023. After the surcharge, their effective tax rate for state and local taxes will be at most 9.2%, just about matching the 9.1% effective tax of the other 99% of Massachusetts taxpayers. But that is still lower than the 10% effective rate paid by the poorest 20%. How is that unfair?
Beyond that, reports of higher taxes chasing millionaires out of other states also fail to support Pioneer’s claim that if you tax them, they will leave. (See sidebar.)

Not the Promised Land

Pioneer calls Florida and New Hampshire, two states with no income tax, “the Commonwealth’s biggest threat.” They found that 67.4% of the state’s net loss of AGI was to New Hampshire and Florida in 2021.

Leaving Massachusetts for a state with no income tax, however, comes at the cost of considerable economic disadvantages. In his impressively thorough study, Michael Mazerov, senior fellow at the CBPP, documents the economic downside of moving from high-tax states, such as Massachusetts, to no-income-tax states like Florida and New Hampshire. In 2021, the median income of Massachusetts households ($89,645) was higher than that of New Hampshire households ($88,465) and considerably higher than Florida households ($63,062). In addition, adjusted for inflation, median household income in Massachusetts grew 22.1% from 2009 to 2020, much faster than the median household income in all seven states without an income tax, including the 11.8% rate in New Hampshire and the 8.4% rate in Florida. In addition, as Mazerov shows, having no income
tax is no guarantee against the loss of high-income households. In fact, Massachusetts’ 2.4% out-migration rate for households with AGI above $200,000 from 2011 to 2021 was lower than the rate in 38 states, and lower than the 2.5% rate in Florida, the 3.0% rate in New Hampshire, and the rate in four of the other five no-income-tax states.

On top of that, interstate migration in the United States has been steadily declining, even though the difference in state tax rates among states has been increasing. In 1990, the combined state and local tax rates of the 10 highest-tax states was 69% higher than the rates in the 10 lowest-tax states. By 2020, that difference was 85%. Nonetheless, the average U.S. interstate migration rate dropped from 2.7% in the 1990s to 1.5% in the 2010s.

Nor are millionaires beating down the doors to get into no-income-tax states. In their 2016 paper, sociologists Charles Varner and Cristobal Young and economists Ithai Lurie and Richard Prisinzano found that the annual millionaire migration rate is lower than that of the general population, and that most millionaires who do move between states go to states with higher or nearly equivalent income tax rates.

The evidence is clear. Cutting the taxes of the well-to-do—or failing to adopt a measure that would require the richest 1% to pay their fair share of taxes—is especially foolish. It’s unlikely to forestall the out-migration of high-income taxpayers. It makes regressive state tax codes yet more unequal. And at the same time, it robs states of the revenues needed to address conditions that cause residents to move out of state.

The Fair Share Amendment is a progressive and effective alternative to tax giveaways to the wealthy. As Wise, of the Massachusetts Budget and Policy Center, concludes in a recent report, “…Massachusetts is not facing an acute or persistent problem with outmigration of high-income households.” With its surcharge, the effective tax rate of the richest 1% will nearly match that of other less well-to-do taxpayers. And this summer the Massachusetts state legislature approved the first state budget that includes fair share revenues. Its $1 billion in revenues will go to improve public transit, fund higher education, provide free school meals, and refurbish school buildings, as well as to fund other projects.

Yet more needs to be done to address the problems confronted by Massachusetts’ low- and middle-income residents. If the state is to slow its out-migration, it must make housing more affordable. High housing prices, as Maserov’s study documents, push out younger residents as well as older residents.
But if you tax fairly and spend wisely, they will stay.

JOHN MILLER is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

SOURCES: Jim Stergios, Mary Connaughton, and Eileen McAnneny, “Tax Reality Sets In,” Policy Brief, Pioneer Institute, May 2023 (pioneerinstitute.org); Kurt Wise, “UPDATED: High Income Households are Not Fleeing Massachusetts,” Massachusetts Budget and Policy Center, July 6, 2023 (massbudget.org); Michael Mazerov, “State Taxes Have a Minimal Impact on People’s Interstate Moves,” Center on Budget and Policy Priorities, Aug. 9, 2023 (cbpp.org): Jason Wright, “Your Fair Share Dollars at Work: Critical Investments and Hard Choices,” Massachusetts Budget and Policy Center, Aug. 15, 2023 (massbudget.org); Aidan Enright, “Debunking Migration Myths,” Policy Brief, Pioneer Institute, April 14, 2023 (pioneerinstitute.org); Eileen McAnneny, “Debunking Tax Migration Myths, The Truth: Tax them and they will leave,” Policy Brief, Pioneer Institute, April 2023 (pioneerinstitute.org); Editorial Staff, “Study: Net Out-Migration of Wealth from Massachusetts Nearly Quintupled from 2012–2021,” Policy Brief, Pioneer Institute, May 15, 2023 (pioneerinstitute.org); “Can Massachusetts Overcome Its Cost and Demographic Headwinds to Compete for Talent,” Spring 2023 Chartbook, Massachusetts Taxpayers Foundation (masstaxpayers.org); “Who Pays? Sixth edition,” Institute on Taxation and Economic Policy, Oct. 2018 (itep.org); Cristobal Young, Charles Varner, Ithai Lurie, and Richard Prisinzano, “Millionaire Migration and Taxation of the Elite,” American Sociological Review, 2016; Cristobal Young, The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich (Stanford University Press, 2018).