Risks and Benefits of a Millionaires Tax

Should Massachusetts introduce a new tax on high-income households — and earmark the revenue for education, roads, bridges, and public transit?

Voters will get to decide as part of a November ballot initiative known as the millionaires tax, which would apply a 4 percent surtax to annual income over $1 million.

Questions abound. Will this tax drive high-earning residents out of state? Can it help address racial inequities? Might the money be diverted for other uses?

In a previous report, we at the Center for State Policy Analysis found that the tax would generate roughly $1.3 billion in revenue in 2023 — and that aggressive tax avoidance would be a bigger challenge than an exodus of high earners.

In this policy brief, we examine additional arguments for and against the millionaires tax. We find that:

  • The explicit commitment to spend all millionaires tax revenue on education, transit, and transportation will be difficult to fully maintain. For every dollar raised by the surtax, spending on these earmarks is likely to increase by 30 cents to 70 cents, with the remainder effectively diverted to other areas of the budget.
  • Even accounting for the imperfect effect of earmarks, the millionaires tax would still generate substantial increases in a number of high-priority spending areas — potentially reducing economic and racial inequality. Increased education spending is known to improve student outcomes, particularly for lower-income students; the economic benefits of transit and transportation spending are less clear.
  • Revenue from the millionaires tax will be highly volatile, rising rapidly in good economic times and falling sharply in downturns. Setting money aside in boom years would address this volatility, but the ballot initiative currently lacks such a mechanism.
  • With the right spending priorities, millionaires tax revenue could directly address racial inequity. However, the real-world impact will depend on the uncertain decisions of future lawmakers.
  • Changing the Massachusetts Constitution — as this ballot question does — would introduce some unlikely but potentially worrisome risks. If there are unintended consequences, they could only be fully addressed through a multiyear process. However, legislators would be able to make temporary fixes via regular law.
  • The number of people paying this tax will grow over time, but likely at a slow rate.