Hidden Link

November 17, 2024

By Evan Horowitz

Ignore the victory laps from supporters of the millionaires tax — and also the tendency of opponents to double down on concerns. The truth is that two years after Massachusetts voters approved a new 4 percent surcharge on income over $1 million, we don't really know how the tax is working. And the little information we have suggests an uncertain mix of real benefits and concerning costs. 

Start with the much-publicized fact that the state collected $2.2 billion in millionaires tax dollars last year. Look closer and you’ll find it’s not really a fact at all. Massachusetts hasn’t yet had the chance to count our millionaires tax dollars because many high-earners only recently filed their taxes (thanks to extensions). 

That $2.2 billion number is the output of a statistical model from the Department of Revenue. A very thoughtful model, from what I can tell, which uses early returns to extrapolate full-year trends in key categories. But it's still just an estimate, subject to some potentially large revisions when returns finally arrive and we do a full tally (scheduled for December). 

But even this tally won't really tell us how much the millionaires tax raised, because it ignores the risk of offsetting losses. For every $1 we collect through the millionaires tax, Massachusetts is likely to lose 20-50 cents in regular income taxes. And those losses are harder to measure. 

Where do these losses come from? The millionaires tax is expected to change people’s behavior in ways that are relevant to other state taxes. That’s because the millionaires tax is a surcharge, an additional 4 percent on top of the standard 5 percent income tax, for all earnings over $1 million. So If some high earners choose to leave the state, or hide a dollar of their earnings, Massachusetts not only loses 4 cents in millionaires tax revenue but 9 cents in total tax revenue. 

To understand the full impact of our millionaires tax, we need to track the balance between direct gains and indirect losses. And the early evidence suggests a real trade-off, dimly visible in the revenue numbers from the last few years. 

Let’s set paychecks aside for a moment and consider all the other kinds of income people earn: gains in the stock market, home sales, small business profits, etc. Taxes on this non-salary income are a big part of Massachusetts’s overall revenue system – and also the driving source of millionaires tax collections. 

Two years ago (in FY 2023), the state collected around $4.9 billion in taxes on this non-salary income. And in a world where the stock market was strong and the state economy was steadily growing, you'd expect these collections to increase around 5-6 percent year to year.  

Instead, in FY 2024 we collected 10 percent less, or $4.4 billion, once you discount new millionaires tax revenue. That's a huge and surprising drop, but it didn’t make political waves because it’s invisible in the monthly DOR reports, hidden by the fact that millionaires tax dollars aren’t distinguished in any way.  

When you make this same apples-to-apples comparison across all the income tax categories — setting millionaires tax collections aside and comparing core revenues — you find a consistent pattern of weakness. The real net gain from the first full year of the millionaires tax era looks closer to $1.3 billion, with the direct collection of $2.2 billion offset by $850 million in various losses.  

That’s still a big infusion of new dollars, enough to support substantial investments in high-priority areas like areas like early education and the MBTA. But the offsetting losses are not trivial, and it’s unclear whether they’ll grow or shrink over time. 

Admittedly, these numbers are all pretty rough. As noted, the $2.2 billion figure is still an estimate, and there were a number of other tax changes in FY 2024 connected to the early implementation of tax cuts. 

But we had better get used to this problem, because it’s not going away. Every year, DOR will be required to certify millionaires tax collections before it can actually count them. And those headline-ready certified numbers will always be shadowed by some substantial, if difficult-to-calculate, losses.  

I’m enough of a numbers guy to believe we will ultimately piece this puzzle together. The best next step is to await the December tally from DOR, which will give us a firmer figure for topline collections (before trade-offs). And we can use monthly collections in FY 2025 to gauge the scale of offsetting losses. Finally, a year from now, the IRS will release the best statistics to determine whether high earners have started moving away or hiding their income. 

In the meantime, I know I won't be able to stop supporters and opponents from doing their partisan best to bury or praise the millionaires tax. But the evidence is a lot muddier. 

ABOUT THE AUTHOR

Evan Horowitz is executive director of the Center for State Policy Analysis at Tufts University.

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