Massachusetts’ upside-down tax system

Asking the richest to pay their fair share would add $2B in revenue

AT A TIME when people across the state seem to agree that our Commonwealth needs additional resources for public investments, asking those with the highest incomes to contribute a similar share of their incomes in taxes as the rest of us could support major investments to boost prosperity and economic opportunity for all.

Every state has its own combination of ways to raise revenue and like most states, Massachusetts has an “upside-down” tax system. The disproportionately smaller percent of income contributed by higher-income residents raises questions about how we pay for the resources that benefit us all.

Our analysis reveals that taxpayers in the lowest-income 20 percent (those making under $22,500/year) in Massachusetts pay the largest portion of their income in state and local taxes: 10 percent. By contrast, the highest-income 1 percent of taxpayers pays 6.8 percent — the smallest share of any group.

If changes to state tax law asked those with the highest 1 percent of incomes to contribute the same portion of their incomes in taxes as the middle 60 percent of households currently do, that would add $2.1 billion to the Commonwealth’s revenues in 2018. That is funding that the Commonwealth could use to address, for instance, the inadequate state funding going to our schools which doesn’t provide all students the resources needed to help them reach their potential.

Not only is our tax system lopsided, but data show it may make racial and ethnic income differences more uneven. A long history of systemic barriers has prevented black and Latino people in Massachusetts from equitable access to high-paying jobs, education, and other avenues leading to higher household incomes.

As a result, these workers are overrepresented among low-income taxpayers and underrepresented among the highest-income taxpayers. Given the structure of Massachusetts taxes, this means black and Latino taxpayers tend to pay a larger share of their incomes in state and local taxes, making it harder for them to get ahead.

The promising news is, there are several states that have turned their tax systems “right-side up,” meaning people with the highest incomes contribute a greater share of their incomes in state and local taxes than do people with middle or low incomes. California, New Jersey, Minnesota, Vermont, and the District of Columbia each have very different economies and tax structures.

In each of these states, however, the highest-income 1 percent pay a larger portion of their income in state and local taxes than do the middle 60 percent or the bottom 20 percent of households. They accomplish this in part by adding to their state tax codes a “millionaire’s tax”—a relatively high, top tax rate on personal income above a certain threshold.

These taxes ensure that those who have the greatest ability to contribute and have benefited most from a state’s economic success pay a greater share of their incomes in state and local taxes. Massachusetts voters would have had the chance to weigh in on a similar “millionaire’s tax” this Tuesday, but the state Supreme Judicial Court struck it from the ballot.

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Meet the Author
This leaves the question of how our state can generate additional revenue or make our tax system fairer largely unresolved. As we begin discussing new sources of revenue for our Commonwealth, it is worth considering whether the state will continue with an upside-down tax system or whether we will ask more from those who can best afford it.

Marie-Frances Rivera is the interim president of the Massachusetts Budget and Policy Center and Phineas Baxandall is a senior analyst there.