Fair_Share_Tax_Reform_Factsheet









We can expand opportunity for our people and strengthen our
economy
by making smart investments to improve our schools;
make our colleges and universities affordable; and build a
transportation system that gets families, students, workers and
customers to the places they need to be. There are fair and effective
ways that we could pay for these
investments. This fact sheet examines one option.









Since the late 1970s, the incomes of most Massachusetts
households
have increased very little while the benefits of economic growth have
gone
disproportionately to the very highest income households in
Massachusetts. From 1979 through 2011, incomes of the Top 1% in
Massachusetts grew ten times faster on an annual basis than incomes of households in the
Bottom 90% (see chart, below). These highest income households captured
just under half of all income
growth in Massachusetts during this
period, well more than tripling their average real annual incomes. This is a
change from the decades immediately following WWII.  In that
period, the benefits of economic growth were broadly shared, as the
chart and table below show.  



















Bar graph: Growing Inequality Replacing Broadly Shared Prosperity




































Table: Compound Annual Growth Rate of Income


























Our economic growth is not translating into significant
economic
progress for most of our people and this directly harms working
families. The lack of more broadly shared economic progress also has harmed our state’s ability to
make important investments that can make life better for working
people. The highest income residents in Massachusetts, who have
captured so much of the gains from our state’s economic
growth over the last several decades, actually pay a smaller share of
their income in state and local taxes than the rest of the population
(see chart, below, and MassBudget’s factsheet,
Examining Tax
Fairness
). When a large share of total income growth goes to
the group
that contributes the smallest share of their income in taxes, this
means tax collections suffer – we wind up with less revenue
to invest in schools, colleges, roads, bridges, buses and
trains.  (Note: The “federal offset” -
shown in the chart below – further reduces tax levels, particularly for
higher income filers. A detailed discussion of the federal offset
follows, below.)



















Top 1% Pay Smallest Share of Income in State and Local Taxes


























Under a recently proposed change to our tax laws, the
state’s highest income households would pay
something closer to the share of their income paid by other
Massachusetts households (see chart, below). This would generate new
revenue to improve public schools, reduce college costs, repair roads
and bridges, and fix our public transit systems.



















Bar graph: Effects of Additional 4% Tax on Income Over $1 Million on Taxes as Share of Income


























The proposed change would tax
income above
$1 million at a higher rate than income under $1 million.1 Income
over
the $1 million threshold would be subject to an additional 4.0 percent
tax. This reform likely would generate over $1
billion in new revenue annually.2










By definition, this change – which would require amending the state
constitution – would affect only those households with taxable incomes
above $1 million (less than one percent of Massachusetts households) and
would only affect the portion
of their taxable income that exceeds the
$1 million threshold. For example, a household with $1,250,000 of
taxable income would pay the additional tax only on the top $250,000 of
this total taxable income. As a result, the overall tax rate
paid by
these high income households on their total taxable
income (also called
their “effective tax rate”) would rise gradually
with increasing income (see table, below). Continuing the example from
above, the effective income tax rate on the total $1,250,000 would be
5.8 percent: a 5 percent rate applied to the full $1,250,000 combined
with an additional 4.0 percent rate applied just to the $250,000
of income that exceeds the $1 million threshold.










Importantly, state and
local
income and property taxes can be deducted
from a filer’s
federal
income when determining a
filer’s final
taxable
federal income, a feature known as the
“federal offset”.3
As a result, these
state and local taxes can reduce the federal taxes a filer owes. For
high income households, federal taxes typically are reduced by an
amount equal to about a third of the state and local income and
property taxes these households have paid (the federal offset is a
deduction that primarily benefits upper income households).4
As a result, the
state-level
tax increase produced by the Fair Share
Amendment would reduce
federal
taxes for most high income filers.










Taking the federal offset into account, we see that high income
households – even those with very high incomes –
would not be paying especially high effective state income tax
rates.  Using the same example from above – but taking the
federal offset into account – a household with taxable income of
$1,250,000 would have an effective state income tax rate of about 3.4
percent under this proposal (see table, below); the federal offset would
reduce this household’s federal taxes by more than $24,000. A
household with $5 million of taxable income would have an effective
state income tax rate of 5.5 percent, with the federal offset reducing
this household’s federal taxes by more than $135,000.



















Table: Effective State Income Tax Rates (ETR) with 4% Additional Tax on Income Over $1 Million



























It is worth noting that evidence from states across the nation shows
that tax increases on top income households produce substantial new
revenue to fund key public priorities,5
while having little to
no impact on the residence decisions of these households.6
Large numbers of wealthy households have not packed up and fled from
states that have
raised taxes in order to move to states that have not.
Moreover, a half-century of research has confirmed the value of
targeted investments in education and the many positive effects such
investments have on individuals, the overall workforce and a
state’s economy.7
Research into the broader effects
of targeted transportation investments likewise reveals how essential
these systems are to creating a successful state economy.8









One way to pay for these investments is with tax
reforms that, as has been proposed, would require the state’s
highest income households – those households that have benefitted the
most during the last several decades and that now have lower tax levels
than the rest of us – to pay an additional tax on the share
of their income that exceeds $1 million a year.









_____________________________________









1The million
dollar threshold would be indexed to inflation, resulting in regular
upward adjustments to the actual threshold figure.

















2
Based on an estimate from the Institute on Taxation and Economic
Policy. A request for a revenue estimate has been made to the
Massachusetts Department of Revenue. When DOR releases that estimate, MassBudget will update this factsheet.

















3Institute
on Taxation and Economic Policy, A Primer on the
“Federal Offset”, August 2011:
http://itep.org/itep_reports/2011/08/how-state-tax-changes-affect-your-federal-taxes-a-primer-on-the-federal-offset.php
 

















4Institute
on Taxation and Economic Policy, Who Pays, 5th
Edition, January 2015: http://www.itep.org/whopays/









Because the federal offset is a deduction from taxable income, its
value to filers differs depending on the top tax rate paid by that
filer. In the federal system, tax rates increase as a filer’s
taxable income rises. For the highest income filers, the top rate on
wage and salary income stands at 39.6%, applied to income above
approximately $400,000 (see IRS 2014 Tax tables, pg. 88:
http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
). Thus, a
high-income filer
who pays $1,000 more in state taxes will deduct that $1,000 from her
federal taxable income – she will not be taxed on this
income. This will reduce her federal tax by as much as $396 if she is
in the highest tax bracket ($1,000 * 39.6% = $396). Capital gains
income – as opposed to wage and salary income – is taxed at
anywhere from 0 percent to 20 percent. The benefit from the federal
offset, as related to capital gains income, thus will be lower than for
most wage and salary income.

















5Political
Economy Research Institute, Raising Revenue from
High-Income Households, March 2012:










http://www.peri.umass.edu/fileadmin/pdf/published_study/Revenue_PERI_March5.pdf










Young & Varner, et al, Millionaire Migration and the taxation
of the Elite, December 2014:
http://web.stanford.edu/~cy10/public/Millionaire_Migration_and_the_Taxtion_of_the_Elite.pdf

















6Center
on Budget and Policy Priorities, State
‘Income Migration’ Claims Are Deeply Flawed,
October 2014:










http://www.cbpp.org/research/state-income-migration-claims-are-deeply-flawed

















7MassBudget
and the Economic Policy Institute, A
Well-Educated Workforce Is Key to State Prosperity, August 2013:
http://www.massbudget.org/report_window.php?loc=education_wages_epi.html
 

















8Political
Economy Research Institute, Prioritizing
Approaches to Economic Development in New England, August 2010:
http://www.peri.umass.edu/236/hash/3f1bd7d2221409d39332894e8e2e0c72/publication/422/










Alicia H. Munnell, “Infrastructure Investment and Economic
Growth,” Journal of Economic Perspectives, Vol. 6, No. 4,Fall
1992:
https://www.aeaweb.org/articles.php?doi=10.1257/jep.6.4.189


























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