Don't Mess With Taxes

Even after targeted tax hikes in Massachusetts and Washington State took effect, the number of rich residents in those states increased.

Republican tax policy over the years has, for the most part, rewarded wealthier Americans. The party’s trickle-down argument is that when the wealthy face lower taxes, they help create jobs and raise overall living standards.

Despite reports that some in the GOP are considering letting the 2017 tax reform law’s top tax rate go from 37 percent to the previous 39.6 percent for the highest earners, most Capitol Hill watchers think that’s unlikely.

That’s also the typical state tax policy. New tax cuts mostly favor the rich across the country, reports Stateline.

A couple of states, however, have bucked that trend, opting instead to increase taxes on their wealthiest residents. Massachusetts created a so-called millionaires tax, and Washington enacted a progressive capital gains tax on wealthier Evergreen State residents.

Since the tax law changes, both states have not only collected more revenue, but they’ve also seen wealth expanding within their borders.

The Institute for Policy Studies (IPS) reports that new data analyzed by it and the State Revenue Alliance show that Massachusetts and Washington State “have seen tremendous growth in the number of people with more than $1 million in total wealth since raising taxes on higher earners.”

The taxes targeting wealthier taxpayers also generated more revenue than originally expected, with the new money “helping fund essential programs that expand economic opportunity for all,” according to IPS.

Massachusetts millionaire tax pays off: Bay State voters in November 2022 agreed to amend their state constitution to allow a 4 percent surtax on all income exceeding $1 million.

Massachusetts’ Fair Share Amendment was pitched to the public as a way to provide extra revenue to help fund education and public transportation. Opponents of the surtax warned of an imminent exodus of millionaires to friendlier tax jurisdictions, with the state’s tax base subsequently shrinking.

However, research shows that high net worth individuals tend to be less mobile and exhibit lower rates of migration compared to the general public. Their family, business, and social networks deeply root them to amenity rich locales, thus higher income taxes do not compel the overwhelming majority of millionaires to move across state lines, notes IPS.

Two years into the millionaire tax, the Fair Share Amendment supporters’ arguments appear to have proved true.

In fiscal year 2024, the surtax produced close to $2.2 billion for the Massachusetts treasury, almost a billion dollars more than what was originally projected. IPS found that in the first three-quarters of the current budget year, the Massachusetts Department of Revenue reported that it is $786 million above its benchmark with the millionaires’ surtax being responsible for a “significant portion” of the surplus.

The additional funds are going toward university scholarships, school meals for young children, and necessary road and rail system repairs.

As for the wealthy paying the tax, they seem to be staying put and doing fine financially.

Using data from WealthX, IPS found a significant increase from 2022 to 2024 in people whose net worth was greater than $50 million. Since 2010, both the millionaire and $50 million or more bracket have skyrocketed in Massachusetts, the report said.

   
Washington state wealth growing: Millionaires in Washington state are equally doing well, according to the report.

The Evergreen State’s capital gains tax took effect on Jan. 1, 2022. It is a 7 percent tax on profits from the sale of long-term assets, those owned for more than a year before selling, that for the 2024 tax year were worth more than $270,000. For 2023, the tax trigger was $262,000.

IPS found Washington had more than 463 thousand millionaires when the capital gains tax took effect in 2022. Two years later, there were more than 681 thousand millionaires, with a wealth increase of more than $748 billion, or 45.2 percent.

“The introduction of a 7 percent tax on capital gains above $250,000 did not hamper the millionaire class’ rate of accumulation, but it did succeed in raising more than $1.2 billion,” according to the report.

“This revenue has expanded public investment into education and, at the time of writing, lawmakers in Washington state are considering a 9.9 percent tax on capital gains over a million dollars,” noted IPS.

$400 billion at the federal level: So, perhaps federal lawmakers should seriously consider a millionaires tax to help offset some of the multi-trillion costs of renewing the Tax Cuts and Jobs Act provisions that expire on Dec. 31, along with new tax breaks sought by the White House.

Such a levy could generate about $400 billion over a decade, according to two new estimates provided to Bloomberg News.

The Budget Lab at Yale projects that taxing income exceeding $1 million at a 40 percent rate would generate $420 billion over a decade. The Tax Foundation in its own preliminary analysis finds that the new bracket would raise $358 billion over the same 10-year period.

You also might find these items of interest:

• Are you still in the shrinking U.S. middle class?
• The current federal tax on Social Security benefits and efforts to end it
• Most Americans favor raising taxes on higher-earners and big businesses

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