MASSACHUSET VOTERS in November will consider a constitutional amendment that would impose a 4% annual surtax on income over $1 million. The debate over the surtax and the merits of the two common types of income taxation – progressive and flat – will likely focus on the “fairness” of tax rates and the “ability to pay”. A related debate will also erupt: whether the amendment will drive high-income taxpayers out of the Commonwealth and into the arms of low- or no-income tax states.
Some opponents of the “millionaire tax” argue that high earners are deeply sensitive to tax rates and that even those earning less than the proposed $1 million threshold will fear that with the breaking of the tax wall uniform, a new graduation of the rates follows. Opponents also argue that while high-income residents stay put, their money won’t; rather, it will fly on the intrepid wings of capital to friendlier climes. As voters ponder this question of “migration”, they should note how past migration in massachusetts by wealthy Massachusetts taxpayers led to today’s “flat tax” system implemented in 1915.
Section 44 of the Amendment to the Constitution of Massachusetts, passed in 1915, states: “Full power and authority are hereby given and granted to the general court to impose and levy an income tax, in the manner provided below. This tax may be at different rates on income from different classes of property, but will be levied at a uniform rate throughout the Commonwealth on income from the same class of property. The High Court may tax non-property income at a lower rate than property income and may grant reasonable exemptions and allowances. »
This amendment authorized, among other things, the first statewide income tax, while prohibiting graduated rates. It partly responded to the intrastate migration of wealthy Massachusetts real estate taxpayers in the mid to late 1800s and early 1900s.
The story of this intrathe migration of state taxpayers is summarized in the dissenting opinion of Justice Robert Cordy in a case decided by the Supreme Judicial Court in 2004. In Peterson v. Commissioner of Revenue, the court held that section 44 prevented the legislature from setting different tax rates for different parts of the same calendar year. Cordy’s dissent explains some of the historical forces that led to the passage of Section 44. Prior to the 1915 amendment, the major taxes levied in the Commonwealth were local taxes. The Constitution then in effect required each municipality to apply a single tax rate to the total value of the real and personal property of each taxpayer within the municipality. Tax rates may differ from city to city, but not within each city.
As the nature of ownership changed in the mid to late 1800s, however, problems arose. According to a 1930s tax treatise by Philip Nichols, before that time “all the personal property of each individual was tangible and visible and kept in the city in which he lived”.
The rise of ‘intangible’ assets – such as stocks, bonds and other financial instruments – has changed the game. Intangible assets and the income derived from them have become difficult to trace. As a special commission of the Legislature explained the story in 1969: “The intangible property tax burden alone provided a significant motive for the concealment of intangible property, as well as for the transfers of domicile from Boston and other cities to smaller communities with lower tax rates and less efficient assessors.
As Justice Cordy noted, “because intangibles were taxed in the homes of their owners, the wealthy could reduce their tax burden by moving their homes from cities with high tax rates and sophisticated appraisers to homes in rural communities with low tax rates and less aggressive and knowledgeable assessors. declined artificially, amplifying municipal income differentials. Nichols noted that this intrastate migration left “barely a fifth of personal assets in [the] Commonwealth. . . subject to taxation. »
Joseph Garland of Gloucester painted a more vivid portrait of this capital flight in his colorful book, The North Shore: A Social History of Summers Among the Notable, Fashionable, Wealthy, Eccentric, and Ordinary on Boston’s Gold Coast, 1823-1929. He notes that “the practice of the wealthy, mostly Boston natives, of evading the general personal property tax in their winter quarters by settling legally in the outlying suburbs, where the rates were incomparably lower, started at Nahant in 1870, and Boston assessors could do little about it. The dodge was perfectly legal and, because the ratings [of personal property] were based on demonstrable assets, tangible assets such as real estate bore the burden while the elusive stock certificate on which the greatest wealth rested eluded detection by but the most sophisticated municipal assessors.
Tax collectors in small suburbs and seaside resorts like Nahant were only too happy to provide havens for wealthy commuters and summer residents, pricing them at face value for what they were allowed to see from their own eyes, leaving the intangibles hidden to the owner and his conscience. »
Harvard economist Charles J. Bullock, in his 1916 history of Massachusetts taxation, also noted that “personal property [in the post-Civil War era] migrated rapidly from Boston, and between 1869 and 1873 no less than $13,900,000 in taxable personal property was transferred from Boston to eight suburban towns and Newport, Rhode Island.
During the same decades, many questioned whether it was wise for cities to rely on the taxation of such intangible personal property, given that, as one political economist put it, they “float easily from place to place. place to place”. Noam Maggor, in Brahmin capitalism (Harvard, 2017), cites a report by the Select Commission on Taxation approved by then-Boston Mayor Nathan Matthews in 1891, which was critical of the existing personal property tax: “Boston and Massachusetts are all two avoided as a house guarded by a wild dog. It is true that one could not be bitten; but it is nicer to go where the dog is not so fierce. Our system is scarecrow and efficient.
In the wake of this history, voters passed Section 44 in 1915. Their authorization of a statewide income tax and geographic uniformity of rates was intended to address past migration. Indeed, the Nichols Treaty quoted by Justice Cordy states that the purpose of the constitutional amendment “was intended to enable the state to impose a tax on intangible securities which could be enforced with some degree of equality without chasing state capital”.
Proponents, opponents and neutral analysts of the 2022 ballot question offer different predictions about the risk of taxpayer migration. A January 2022 study from Tufts University’s Center for State Policy Analysis found, “Some high-income residents may move to other states, but the number of movers is likely to be low,” between 250 and 1 000 million dollars. likely reducing expected revenue from the new tax “by about 5% and costing the state about $100 million in 2023.”
In 2021, the Pioneer Institute published a white paper entitled: “Do the Wealthy Migrate from High-Tax States? The newspaper found that the “[a]wealthy taxpayers are responsible for an inordinate proportion of state tax revenue,” and that “data show a strong correlation between state taxes and migration.” Also in 2021, the Beacon Hill Institute published “The Economic Effects of a Massachusetts Millionaire’s Tax”, which concluded that “[t]he proposed that the surcharge reduces the demand for labor services and the quantity of labor services provided, the latter through a reduction in labor market participation and emigration of workers to high income. Others noted that the 2018 federal law limiting the income tax deduction for state and local taxes to $10,000 could further skew migration patterns.
In the debate to come this fall, an income tax surtax – not a property tax on financial instruments – is at issue. But, as voters weigh predictions about a possible “capital flight” from Massachusetts, they might recall that the taxpayer flight was itself a catalyst for the existing “fixed” income tax rate required by the government. article 44. The history of article 44 shows that 19eMassachusetts taxpayers of the last century often voted with their feet.
Thomas A. Barnico teaches at Boston College Law School. As Assistant Attorney General, he argued the Peterson case. He is the author of a recent novel, War Collegeset at the time of the Vietnam War.