A new report from the nonpartisan Center for State Policy Analysis at Tufts University finds a proposed state tax on income and profit over $1 million could help reduce inequality.
But the report also raises questions about how the additional money would be spent.
Researchers analyzed the so-called "millionaires tax," which would add a 4% tax on income over $1 million. That threshold would increase over time to account for inflation, under a ballot measure that will be decided voters in November.
The tax would bring in an additional $1.3 billion in revenue to state coffers in 2023, the researchers found. That estimate accounts for possible tax avoidance strategies and the likelihood that some taxpayers might leave the state rather than pay the added income tax, according to the study.
"The impact on the overall economy is probably very small," said Evan Horowitz of Tufts, who co-authored the report. "But the ability to make targeted investments is real and meaningful."
Massachusetts currently taxes all income at the same rate: 5%. The ballot question would etch the surtax on high earners into the state's constitution. Proponents of the measure say the additional revenue would fund education and transportation.
However, Horowitz says in the past, the percentage of earmarked funds that reached their intended targets ranged from 30%-70%. That's because tax revenue in Massachusetts comes with flexibility to be spent on priorities defined by lawmakers.
Where the money goes "depends on a lot of different factors," Horowitz said. "How strong are the unions pushing for you to use this money in a particular way? How accountable are your politicians? How easy is it to count up the money?"
Steve Crawford, a spokesman for Raise Up Massachusetts, a coalition of labor unions and community organizations pushing for the new tax, said language in the proposed amendment specifies "public education" as well as "roads, bridges and public transportation." He also said the coalition intends to act as a watchdog group for how the money is used if the amendment is passed.
“No one disagrees that we need more money for education and transportation," Crawford said. "This provides a dedicated long-term revenue stream for that purpose.”
Part of the Tufts report looked at whether more spending on education and transportation leads to better outcomes. Researchers found an extremely strong correlation between higher education spending and better student outcomes. They did not find a clear correlation between higher spending on transportation and overall economic growth.
According to numbers from the state Department of Revenue, a tiny portion of Massachusetts households — 0.6% — made incomes over $1 million in 2019. Some 90% those households were white. The Economic Policy Institute has ranked Massachusetts as the sixth worst state in the country for income inequality.
Groups pushing for the tax argue it would promote equity and help people who likely haven't benefited from generational wealth.
Opponents of the tax, including business groups and some small business owners, say it would add to the burden on businesses at a time when employers are already facing higher costs due to inflation, staffing challenges and supply chain problems that have been exacerbated during the COVID-19 pandemic.
Another concern raised by groups such as the Massachusetts Taxpayers Foundation is that adding a tax through a constitutional amendment removes lawmakers' flexibility to raise or lower the tax rate in response to economic changes. One shift currently underway is the rising popularity of remote work and other flexible employment arrangements. Data shows more people have left Massachusetts since the start of the pandemic, which the Mass. Taxpayers Foundation attributes, at least in part, to many. employees' newfound ability to work remotely.
"Imposing a 4% increase will only compound this problem by giving people another reason to leave Massachusetts," the group stated in a recent analysis.