Today, Massachusetts took a small step toward attaining a fairer tax system. The legislature’s Joint Committee on Revenue heard public testimony on an initiative petition that would establish an additional tax on incomes over $1 million. This hearing is a key step in a four-year process that would potentially put the question of a “fair share tax” before the Commonwealth’s voters in 2018.
Members of the Joint Committee on Revenue listen and take notes during public testimony on the Fair Share Tax amendment.
Before I go into greater detail about this proposal and why I think it’s a good idea, it might be helpful to present some background information on the income tax in Massachusetts.
Currently, it is unconstitutional in the state of Massachusetts for the government to tax different income levels at different rates. This restriction originates from Article 44 of the Massachusetts Constitution, which was ratified by the state’s voters in 1915.
Article 44 is probably most well known as the reason Massachusetts has a flat income tax rate for people of all income levels. When article 44 was ratified by the state’s voters, it was during the advent of stocks, bonds, and other financial instruments–a new class of property known as intangible property that had not been encountered previously. The tax system of the time allowed municipalities to set their own tax rates on intangible property (as they do with other types of property, such as real estate), which lead to varying tax rates throughout the state, typically with cities having the highest rates. Under this system, the wealthy would often shift domiciles from cities to towns in order to take advantage of lower tax rates, and in some cases, to try their luck at hiding intangible income from assessors that had fewer resources at hand to ensure all owed tax was being collected.
Article 44 sought to remedy this situation by establishing the power of the General Court (the formal name for the state’s legislature) to levy state-wide taxes on various classes of income, including intangible income, as long as tax rates were uniform for each class. So, although many see article 44 as a limit on the legislature’s power to establish a more nuanced income tax system in the present day, at the time it was a major expansion of the legislative branch’s power to levy taxes.
While the establishment of a state income tax that applies equally to residents regardless of city or town made sense in 1915–and continues to make sense today–the requirement that the income tax rate be flat for all income levels has proven to be inherently unequal. For a single mother making $45,000 per year in greater Boston, every dollar is important. She spends a great deal of her income on basic necessities for her family like shelter, transportation, food, and clothing (some of which are taxed, some not). However, as a person’s income increases, the proportion of their income that they must spend on basic needs decreases. They spend a smaller percentage of their total income on necessities that are subject to other forms of taxation, like sales and fuel taxes, and when you add up all the taxes an individual or family pays over the course of the year, it turns out that the richest 1% are being taxed at a lower rate than middle and working class families.
Right now, the poorest Massachusetts residents wind up paying more of their income in taxes than anyone else. Chart produced by the Massachusetts Budget and Policy Center, CC BY 4.0.
There have been many attempts to correct this phenomenon–the personal income exemption, the earned income tax credit, and exemptions for food and clothing from the state sales tax, to name a few. However, these solutions often require a reduction in state revenue because the legislature is constitutionally barred from asking the highest earners to make up the difference.
For this reason, I feel that it is time for Massachusetts to amend its constitution to allow for more equitable effective tax rates. Which brings us back to today’s hearing.
Before the Revenue Committee was H.3933, a constitutional amendment which would create an additional 4% tax on income over $1 million. This is a simple, straightforward proposal that will create parity between the effective tax rates paid by the richest and the poorest in Massachusetts, and in doing so, will raise an estimated $1.9 billion annually to finance public education, roads and bridges, and public transportation.
In order for this proposal to appear on the ballot in 2018, it must receive 50 affirmative votes at a Constitutional Convention during the current legislative session, and 50 affirmative votes at a Constitutional Convention during the next legislative session. The next convention is set for February 3rd, 2016.