Could tax cap influence fight over millionaire tax?

The resurfacing of the long-dormant tax cap after 35 years was enough to kill the Legislature’s $1 billion tax relief initiative. Now some are wondering whether the cap can also put a dent in the momentum behind a constitutional amendment appearing on the November ballot to create a millionaire tax. 

The tax cap limits how much tax revenue Massachusetts can collect and requires the state to return to taxpayers any amount collected above the cap.

The cap is being triggered this year for the first time since 1987, and some analysts say a millionaire tax, which could boost tax revenues by as much as $2 billion a year, could help trigger it again in the coming years.

Eileen McAnneny, the president of the Massachusetts Taxpayers Foundation, said she thinks it’s possible. And she questioned whether it made sense to impose what she considers a politically risky tax on millionaires when the cap is simply going to return a large portion of the revenue the tax will yield back to taxpayers.

“If the state is in a position to give back billions of dollars, then it probably has sufficient revenue,” she said. “Is the millionaire tax really necessary?” 

Andrew Farnitano, a spokesman for the Fair Share coalition working to pass the millionaire tax, said the group has been looking at the issue. “We are trying to figure out exactly what this means,” he said.

But Farnitano said the tax cap is not a major concern because the millionaire tax is a long-term initiative. He said it’s about providing more revenue for education and transportation in the state and making the tax system more progressive by assessing a 4 percent surtax on income over $1 million.

“The Fair Share Amendment is not about one budget or one economic cycle. It’s for the long term,” he said. 

Budget analysts are uncertain whether the tax cap is going to become a recurring phenomenon, but the cap’s formula provides some clues.

The tax cap is calculated by multiplying the average of the growth in wages and salaries over the previous three years by the “allowable revenue” from the previous year. If actual tax revenues exceed that amount, the excess must be returned to taxpayers on a proportional basis, meaning those who pay more in taxes get more back. 

The tax cap was triggered this year because capital gains and business taxes soared while wage and salary growth lagged, largely because of COVID impacts in 2020. With inflation surging and a recession looming, it’s difficult to calculate how tax revenues will respond. 

Phineas Baxandall, senior policy analyst and advocacy director at the Massachusetts Budget and Policy Center, said he thinks the tax cap is unlikely to be triggered again quickly. 

“By FY 2024, the first year where most of the Fair Share revenue will be first showing up, the allowable revenue calculation will be reflecting much of the inflation experienced in 2021 and 2022, as well as people returning to work, and capital gains revenues are likely to be somewhat lower due to the correction in the stock market,” he said in an email.  “All this is pretty speculative, but some provide reasons not to expect the cap to have as much bite by 2024.”  

Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, is of the same mind.

“I actually did some quick modeling of this and I think that, even with the millionaires tax, it’s much more likely that we return to the world where this law (almost) never matters,” he said.




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