September 12, 2024

CommodityReportersGuild

Investing and Stocks News

From ‘Taxachusetts’ to ‘City Upon a Hill’ 

A historic home along the Battle Road, a preserved route that follows revolutionary events in Lexington and Concord. 2020.

A recent Wall Street Journal article quoted former New England Patriots Head Coach Bill Belichick commenting on the team’s struggles to recruit talent, especially free agents. The main problem is taxes.  “That’s Taxachusetts,” Belichick lamented, “Virtually every player, even the practice squad, even the minimum players are pretty close to $1 million. Once you hit the $1 million threshold, you pay more state tax in Massachusetts.” It’s difficult to compete with teams in states that have flat income taxes 

It’s not just the New England Patriots that are struggling to get talent. The Commonwealth of Massachusetts had a net outflow of over 26,000 taxpayers, costing the state $3.87 billion in 2022 alone. Research from Boston University shows that the number one reason taxpayers are fleeing is healthcare costs. 

The good news is that it does not have to be this way. Massachusetts can become what John Winthrop once envisioned, “that we shall be as a city upon a hill — the eyes of all people are upon us.” Massachusetts can once again become a place that draws Americans instead of chasing them out by getting government out of the way and properly prioritizing spending. 

How Massachusetts Became Taxachusetts  

Any student of American History will learn that Massachusetts was an epicenter of the American Revolution. The colonists in Massachusetts were pushed to Revolution because the British Empire had taxed them to ruins and blocked their ability to freely trade with the rest of the world. 

It would pain the men who fought at Lexington and Concord in 1775 to know that their home earned the moniker “Taxachusetts” 200 years later. Daniel Flynn comments that the Bay State’s history of tax policy has been a story of “legislators forever indulging the appetite and never prescribing a diet.” The state instituted the first income tax in 1915, which, according to Harvard economist Charles Bullock, would be “a substitute, complete or partial, for the existing tax on personal property.” As Flynn notes, neither the income tax nor the property tax was eliminated. Instead, both were solidified. Policymakers in Boston continued spending, especially after World War II. Two of the most notable expansions of state spending were the state’s takeover of the Boston Elevated Railroad in 1947 and the growth of state-funded higher education.  

Boston did not stop with income and property taxes. The state also levied a sales tax in 1966 (which was promised to end in 1967 but is still in place today) as well as a state lottery the following year. to The Massachusetts Budget and Policy Center found that by 1977 that taxes in the Bay State made up 13.8 percent of state personal income, higher than all other states except Alaska and New York. 

The tax revolts of the late 1970’s and early 1980’s brought a brief respite to lowering tax rates. In 1980, voters approved Proposition 2 ½, which limits the amount of property tax revenue a municipality can raise through real and personal property taxes. In 1989, the legislature increased the personal income tax rate from 5 percent to 5.75 percent (promised as a temporary increase), but the rate was raised to 6.25 percent in 1990, then fell to 5.95 percent in 1992. The legislature cut the rate again in January 2000 to 5.85 percent. In November of that year, voters approved a ballot measure Question 4, which reduced the personal income tax rate from 5.85 percent to 5.6 percent for tax year 2001, 5.3 percent for tax year 2002, and 5 percent for tax year 2003. In 2002 (Question 1) and 2008 (also Question 1), Bay States had the opportunity to amend the state constitution and eliminate the personal income tax, but both attempts failed. 

The appetite for spending in Boston continued when Governor Romney signed Chapter 58 of the Acts of 2006 into law, also known as “Romneycare.” This mandate, a precursor to Obamacare, “promised to achieve universal health insurance coverage while controlling costs.” Romneycare ended up failing to cut costs. Much like its successor Obamacare, Romneycare placed immense financial stress on the state due to above-projection enrollments and healthcare costs. 

In November 2022, Bay State residents voted to amend the state constitution to change from a flat income tax of 5 percent to a graduated income tax, which would levy a “4 percentage point surtax on the portion of people’s income in excess of $1 million.” That same year, five states would switch from a progressive income tax to a flat income tax, with 10 other states cutting personal income tax rates in 2023.  

To add insult to injury, in 2023 Massachusetts also placed an extra payroll tax on employers to replenish its unemployment insurance trust fund after massive unemployment caused by the lockdowns in 2020. That tax hike, however, hurts everyone. The money that paid toward the additional payroll tax could have gone toward growing their businesses, hiring new employees, and/or increasing compensation for current employees, known also as deadweight loss. 

Ultimately, a complex tax code breeds tax avoidance. As the tax code becomes more complex and tax rates become more progressive, taxpayers (especially high earners like professional athletes) will look for creative ways to avoid paying high tax rates such as changing how they’re compensated such as being paid through an LLC rather than directly to the taxpayer or receiving employee paid health insurance. Those who do not have the time or the means to find loopholes in the tax code leave for states with lower costs of living.  

Tax Policy Chases Out Residents 

By moving to raise taxes at a time when other states were making cuts, it’s no wonder that residents are fleeing by the thousands. Since 2000, Massachusetts has ranked middle of the pack in economic freedom and tax policy, consistently, spending well above the population and inflation growth.  

Massachusetts has also seen a consistent net outmigration of both people and adjusted gross income over the past 30 years with brief exceptions from 1998-1999, 2001, and 2009. From 1993-2022 Massachusetts lost over 300,000 taxpayers and an estimated $32.88 billion. 

The Bay State lost people and income to every bordering state except Connecticut in 2022. Among the Northeast states, New Hampshire gained the most residents and income from Massachusetts. Nationwide, the only state that gained more residents and income from Massachusetts than New Hampshire was Florida.   

To make matters worse, research shows that 68 percent of taxpayers leaving Massachusetts are age 26-54, with the largest category leaving by volume age 26 to 34. As younger workers leave for opportunities elsewhere, the more difficult it becomes to sustain the state’s massive budget in the future. If changes are not made, Massachusetts will suffer a fiscal crisis. 

A Path to Becoming a City Upon a Hill (And Maybe Some Championship Wins Too) 

The best path forward is for Massachusetts to restrain state government spending. The name “Taxachusetts” was earned by enabling an insatiable appetite for government spending. The Bay State can become a “City Upon a Hill” by reining in spending and simplifying the tax code. 

Tax and spending reforms takes more than “electing the right people.” It must be politically profitable for the wrong people to make the right choices. What does that look like? Let’s return to the example of the New England Patriots. Attracting talent (and possibly more Super Bowl wins) could be as simple as reducing tax rates and simplifying the tax code. Improving the tax code would also mean tackling the number one reason taxpayers are fleeing the bay state. At the same time, these tax code improvements could also increase revenue due to the increase in economic growth. Everyone would win. 

These tax changes would also need to be paired with spending cuts. If Boston lawmakers had constrained spending to the growth rate of population plus inflation starting in 2018 (the last season the Patriots’ won the Super Bowl) it would have saved taxpayers a total of $7.5 billion (just over $1,000 per resident).  

By reducing taxes and spending, Massachusetts can become the “City Upon a Hill” once again, where families and businesses will want to live and work. Other states look will look to replicate Bay State success (and maybe the Patriots will win a few more Super Bowl rings too).