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Massachusetts Moves to Impose Surtax on High-Income Taxpayers

This step could have planning and national implications

On May 18, 2016, the Massachusetts Senate and House voted to amend the Massachusetts Constitution to impose a surtax on taxpayers with taxable income in excess of $1 million. Specifically, the proposed amendment would levy a 4 percent surtax, in addition to regular income tax, on taxable income in excess of $1 million reported on “any return.” Massachusetts currently has a flat income tax of 5.1 percent. Assuming no change in that rate, the new surtax would result in a Massachusetts marginal tax rate of 9.1 percent on taxable income above $1 million. If this amendment is approved at a Constitutional Convention in two years and then passed by voters in November 2018, the new surtax would become effective in tax years beginning on or after Jan. 1, 2019.

Planning Implications

This development has interesting implications. It’s never easy to predict how a change in tax law will affect behavior. On a narrow level, it will impact taxpayers in Massachusetts. Will this lead to even more wealthy Massachusetts residents fleeing the Commonwealth for sunny Florida? Will high-income Massachusetts taxpayers seek to accelerate income into 2017 and 2018, ahead of the tax increase? In the world of trusts, it’s no secret that Massachusetts has lost a significant amount of trust business recently to low-tax states with more modern trust statutes, like Delaware and South Dakota. To be a Massachusetts resident trust, a trust must have at least one trustee who is a resident of Massachusetts. Will Massachusetts trustees now feel even more pressure to resign in favor of trustees from other states? Will lawyers advise their clients to establish multiple smaller trusts for their beneficiaries or divide existing trusts into multiple trusts to keep taxable income under $1 million? One thing is certain: The law won’t take effect until at least 2019, giving planners plenty of opportunity to find ways to avoid the surtax even before it takes effect.

National Implications

On a broader level, the question is whether this development will have national implications. If Massachusetts enacts this surtax, will other states follow suit? Massachusetts has a long history of being a leader in the nation in significant national developments—for example, public education, same-sex marriage and health care reform. Could this be a harbinger of things to come? At least four other states (Colorado, Maine, Minnesota and California) are also considering tax increases on high-income taxpayers. If these tax increases come to pass, how will wealthy taxpayers react? Many high-income taxpayers have watched the campaign of Bernie Sanders with alarm and fear that the United States may soon become a socialist country. Recent reports from the Treasury Department show that Americans are expatriating at a record pace. It’s conceivable that a development like this could confirm the worst fears of wealthy Americans and lead even more of them to consider leaving the country.

So time will tell. Perhaps this surtax will never become law. Perhaps Massachusetts will implement this surtax but no one else will follow. (Massachusetts, after all, was the only state to vote for McGovern in 1972.) Or perhaps other states, emboldened by Massachusetts, will enact similar tax increases. If that were to happen, it would signal a very profound change in tax policy in the United States, with consequences that can’t be predicted with confidence.

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