Argument

Is it fair that Massachusetts penalizes you for saving? At 12 percent, the tax on investment income is double the rate on wages and salaries, and is the highest tax on personal income in the nation. This tax unfairly penalizes hundreds of thousands of working men and women across the Commonwealth who are struggling to save.

From a historical standpoint the tax on investment income is a relic of a bygone era. The tax was first introduced in the early part of the century with the intention of raising revenue for cities and towns by taxing the investment property of the well-to-do. Today’s world is entirely different. For one thing, cities and towns no longer see any income from this tax; it has continued as an unintended burden on all Massachusetts savers, the great majority of whom are folk of modest means.

In today’s environment, all responsible taxpayers feel a great need to invest their hard-earned money to support them in retirement, to educate their children and grandchildren, or simply to buy a home. Although the tax was originally designed to affect the rich, in fact 60 percent of the taxpayers paying at the 12 percent rate earn less than $50,000 per year, hardly an exorbitant income. Yet these are the citizens who are saddled with this punitive 12 percent tax — not the corporate executive and professional athlete who make million-dollar salaries. These highly paid individuals are sheltered from the confiscatory 12 percent rate by large holdings in their companies’ “qualified” pension and profit-sharing plans.

This 12 percent tax is especially punitive to senior citizens, who depend on income from investments and savings to live on. Massachusetts residents over the age of 65 make up 13 percent of the state’s population, earn 8 percent of the taxable income, but pay a whopping 33 percent of the money raised from the tax on investments. Is it fair to work hard your entire life, act responsibly by saving for your future, and then have to pay double the tax on your investment income? What this highest-in-the-nation tax does, in effect, is discourage people from saving or investing — just the opposite of what the state should be encouraging its taxpayers to do.

To avoid paying this excessive tax many retirees with sufficient means simply leave the state. A recent study conducted by Standard & Poor’s DRI, one of the world’s leading economic forecasting firms, found that over the past decade, Massachusetts lost almost 200,000 residents to other states. Many of those seniors moved to New Hampshire or Florida. Florida has no income tax, and New Hampshire levies only a 5 percent tax on interest and dividends.

Massachusetts can’t afford to lose these residents to competing states. Every time a person of wealth departs for tax reasons, it signifies that Massachusetts has once again shot itself in the foot. Why should any person of means pay excessive taxes to the Commonwealth when he or she knows how easy it is to change domiciles? By driving away our affluent taxpayers, we not only lose the opportunity to collect income taxes from them at the regular rate, but we also lose millions of dollars in excise, sales, and property taxes as the benefits of their capital go elsewhere — clearly a lose/lose outcome for the state. Meanwhile, those who can least afford it stay and pay the excessive 12 percent tax.

Can Massachusetts afford this tax cut? The answer clearly is “yes.” Today, the Commonwealth is benefiting from an annual revenue surplus of about $700 million dollars. Once fully implemented, a reduction in the 12 percent tax rate would have a revenue impact of between $250 and $300 million dollars a year, an amount the state can easily afford without cutting programs.

But this shrinkage would only be temporary. The Standard & Poor’s DRI study determined that the economic benefits from this tax reduction would largely be recovered over time — making it essentially revenue neutral. The study shows that lowering this tax would attract 60,000 residents, produce new businesses, and create 28,000 new jobs. It would also spur growth in the real estate market, services, and retail outlets throughout Massachusetts. All of this adds up to sound economic policy for the Bay State.

Meet the Author
If Massachusetts is truly to make its tax system more rational and fair, and put us on a better competitive footing with other states, legislative action must be taken promptly to “level the playing field” for all our taxpayers by reducing the 12 percent rate on investment income. Failing that, supporters of this tax reform measure, who have already gathered most of the needed signatures, will be obliged to place this question on the ballot in the fall to let the voters decide the issue.

Massachusetts has certainly come a long way in recent years to change its long-standing reputation as a high-tax state. But the “Taxachusetts” image will never be fully eradicated as long as we are the only state in the nation that imposes a double tax on people who are trying to save. Now is the time to do away with this unfair tax, by reducing the 12 percent rate on investment income to the same rate that applies to all other income. It is the right and fair thing to do for Massachusetts and its taxpayers.

William Tyler, a lawyer at Rackemann, Sawyer & Brewster, is chairman of the Committee for Fair and Simple Taxation.

Massachusetts currently taxes personal income at different rates: Wages and salaries are taxed at 5.95 percent, while income from dividends and interest on accounts in non-Massachusetts banks (and from capital gains on assets held for less than a year) are taxed at 12 percent. Long-term capital gains are taxed at variable rates less than 5 percent. The Committee for Fair and Simple Taxation has urged the Legislature to bring the 12 percent rate on investment income down to the level of the rate on wage and salary income. The Committee also prepared this spring to take the question to the voters in a ballot campaign this fall if the Legislature fails to act. CommonWealth invited William Tyler, chair of the Committee, to make the case for the tax cut and Jim St. George of the Tax Equity Alliance for Massachusetts to make the case against (See “Counterpoint“, CW, Spring 1998).