Over the past two decades, the Commonwealth of Massachusetts has seen its state tax revenues fall by an amount equivalent to $5.95 billion annually.
According to the Massachusetts Budget and Policy Center, this loss is the result of a variety of factors — most notably, $4.15 billion in cuts to various income taxes, including cuts to taxes on long-term capital gains, dividend, and interest income. These tax cuts disproportionately favor those with higher incomes, further exacerbating wealth and income inequality.
To put these figures in perspective, existing state tax revenues for Fiscal Year 2020 total $24.22 billion. In that context, the annual loss of $4 to $6 billion is crippling our ability to invest in transit infrastructure, housing programs, public schools, and vital services.
In short, the Commonwealth has been engaged in a two-decades-long program of austerity.
The results of this austerity can be seen all around us — in the multi-billion dollar MBTA state-of-good-repair backlog, structurally deficient bridges, and the nation's worst rush hour traffic — in homelessness, affordable housing waitlists, and cuts to housing voucher programs — and in our inability to fully fund public education.
Austerity began under a string of Republican governors in the 1990s and early 2000s. Attempts to raise progressive revenue during the Deval Patrick-era didn't make it very far. Democrats, of course, have enjoyed a supermajorities in the legislature throughout this period.
Since 2015, progressives have pointed to the Fair Share Amendment — a 4% surtax on personal incomes in excess of $1 million — as our best hope for making big investments in transportation and education. Last year, however, a group of business leaders filed a lawsuit to throw Fair Share off the ballot, arguing that the components of the proposal failed the "relatedness requirement." By a 5-2 vote, the state's Supreme Judicial Court agreed.
Because it's an amendment to the state constitution, Fair Share must now begin another four-year journey to the ballot. For my part, I am proud to be a legislative co-sponsor of Fair Share (H.86 and S.16 will be heard by the Joint Committee on Revenue this Thursday). Fortunately, this iteration is not subject to the "relatedness requirement" since it's filed as legislation.
Fair Share is projected to generate about $2 billion annually, with the full impact being felt around Fiscal Year 2024.
However, we must acknowledge that we cannot wait another five years for significant new revenue. We're facing a confluence of issues requiring major public investment right now.
14 Options for Raising Progressive Revenue
Fortunately, we can take action to raise new, progressive revenue right now. Earlier this year, the Massachusetts Budget and Policy Center issued a report, 14 Options for Raising Progressive Revenue.
The report starts by outlining the regressive nature of our existing tax structure.
According to MassBudget:
Large tax cuts enacted in Massachusetts during the last several decades...have significantly reduced our ability to invest in our communities. At the same time, our state and local tax system remains “upside-down”: low- and moderate-income households pay a larger share of their income in taxes than do households with higher incomes. In fact, the highest-income households in Massachusetts – those in the top 1 percent – pay a smaller share of their income in state and local taxes than does any other income group.
Moreover, the upside-down structure of our tax system is particularly detrimental to Black and Latinx communities. Due to a long history of systemic barriers to opportunity, Black and Latinx households are over-represented in lower-income groups (the groups paying more of their income in taxes) and under-represented in high-income groups (the groups paying a smaller share of their income in taxes).
The MassBudget report goes on to describe 14 ways the Commonwealth could generate new revenue in a progressive fashion. Notably, none of the proposed options would require amending the state constitution.
Introducing HD.2849, An Act implementing progressive options for raising new revenue.
Drawing on the material provided in the "14 options" report, I am filing HD.2849, which provides ways to act on several of the MassBudget recommendations. HD.2849 provides a menu of options, including:
- Raise the rate on long-term capital gains to 8.95%, putting Massachusetts in line with other progressive states.
- Raise the rate on dividends and interest to 8.95%, putting Massachusetts in line with other progressive states.
- Freeze the Part B (wage and salary) rate; currently, this is set to go down by 0.05% this year.
- Increase Earned Income Tax Credit to 50% of the Federal EITC, allowing lower-income households to keep more of their income.
- Eliminate the "step-up-in-basis" on capital gains, a progressive reform supported by Larry Summers.
- Increase the alternative minimum corporate tax to ensure that all large corporations pay some reasonable tax in Massachusetts.
- Increase high value real property transfer excise tax, adding a surtax on transfers of homes worth more than $2.5 million.
- Increase the estate tax for high-value estates.
Combined, these proposals would make our tax system more progressive and allow us to systematically address wealth and income inequality while making big new investments in public education, affordable housing, transit infrastructure, and more.
Toward a People's Budget
The response to decades of austerity is a People's Budget.
What would a People's Budget look like in Massachusetts? And what could we do with some (or all) of the progressive sources of revenue described above?
A few ideas come to mind:
- Fully fund public schools, by adopting proposals like the PROMISE Act.
- Fully fund public higher education, by adopting proposals like the CHERISH Act.
- Increase funding for public housing and affordable housing production and preservation; support policies to guarantee housing for all.
- Fund 20,000 housing vouchers (the state funded 20,000 MRVP vouchers in 1990; today we fund less than half that amount; meanwhile, family homelessness has doubled).
- Make the MBTA (and RTAs) free of charge.
- Accelerate efforts at reducing/eliminating the transportation maintenance backlog.
- Move forward on transit expansion projects.
- Expand the Healthy Incentives Program.
- Consider potential for a Massachusetts-based Green New Deal.
- Restore and boost funding for key programs, departments, and services. The list of examples where additional funding is needed is very long. As a state legislator, I am confronted with the need for major new revenue every day.
Adopting progressive rates on capital gains, dividend and interest income would allow us to raise $3 billion right now.
A subset of the proposals in the "14 options" report are noteworthy because they target so-called "unearned income," such as long-term capital gains, dividends, and interest. This income largely goes to the top 1% of households in Massachusetts, and taxing this income in a more progressive fashion would allow us to make immediate progress on our most pressing priorities.
One potential proposal might look like this:
- Raise the rate on long term capital gains to 8.95%.
- Raise the rate on dividends and interest to 8.95%.
- Eliminate the "step-up-in-basis" on capital gains.
Combined, these three options could yield $3 billion in new revenue annually.
The MassBudget "14 options" report explains why a proposal to raise taxes on capital gains, dividends and interest would make our tax code more progressive:
These forms of income – especially income derived from stocks, bonds, and other financial assets – go overwhelmingly to households with the top 1 percent of incomes. For instance, the highest-income 1 percent of households receive approximately 80 percent of capital gains income in Massachusetts, while the bottom 80 percent of household – all middle- and low-income households put together – receive only 3 percent.
The Commonwealth cut tax rates especially sharply over recent decades for these types of income that are most concentrated among the highest-income households. Prior to 1998, wages and salaries (often called “earned income”) were taxed at 5.95 percent. This was roughly half the 12 percent tax rate on income from dividends and interest, a source of "unearned income" which includes income from savings accounts and annual distributions from stocks or mutual funds. Capital gains, another source of unearned income from the profits on stocks, bonds, real estate, and other assets, was taxed at 6 percent in 1996 and is currently taxed at the same rate as wages and salaries.
Presently, long-term capital gains, dividends, and interest are taxed at the same 5.05 percent rate as wage and salary income. Raising the tax rates on this “unearned income” would be a highly progressive way to raise additional revenue because ownership of these assets (especially financial assets such as stocks, bonds and cash holdings) is narrowly concentrated in top-income households. Taxing dividend and interest income at the prior rate of 12 percent would generate about $840 million annually for the Commonwealth. With capital gains taxes now delivering about $1.7 billion in revenues annually, each one percentage point increase in the capital gains tax rate would generate approximately $300 million in additional annual revenue.
It's worth noting that many other states tax long-term capital gains at rates significantly higher than we do in Massachusetts. For example, California is at 13.3%, Minnesota and Oregon are both at 9.9%, Vermont, New Jersey, and Iowa are at 9.0%, New York is at 8.8%, Maine is at 8.0%, and several other states are well above the current Massachusetts rate of 5.05%.
It's also worth noting many other states tax dividend and interest income at rates much higher than we do in Massachusetts.
The MassBudget "14 options" report also explains in greater detail the proposal to end the "step-up-in-basis" for capital gains:
When people make a profit by selling assets (stocks and bonds, houses, art, etc.) for more than they paid for the assets, they typically pay capital gains taxes on the income resulting from the increase in value. A special preferential rule, however, applies for inherited wealth. Someone who inherits wealth and later sells it will pay taxes only on the increase in value that occurs after inheriting the asset, leaving the appreciation in value that occurred prior to inheriting the asset untaxed. This readjustment to the taxable appreciation of an inherited asset based on its value at the time of inheritance is referred to as the “step-up in basis.” According to the Governor’s Tax Expenditure Budget, this “nontaxation of capital gains at death” will result in $841.9 million in foregone revenue for the Commonwealth in FY 2019.
The benefits of this tax break on inherited wealth are concentrated very narrowly on the most affluent households because wealth is so unequally distributed (much more so than income). Also households with high wealth are able to pass on more wealth that has never been taxed to their heirs, largely because of stepped up basis. Ending stepped-up basis would have a muted impact on middle-income taxpayers because their wealth tends to be in their homes. While homes often appreciate over time and frequently are passed on to heirs at time of death, the increased value of residences is insulated significantly from capital gains taxes because of separate tax rules that provide large exemptions for home sales.
Economic studies conclude that the subsidy granted to capital gains on inherited wealth is inefficient for the economy, encouraging people to hold assets for longer than would otherwise make sense. President Obama in his 2016 budget proposal and in a plan put forward by the co-chairs of the 2010 bipartisan National Commission on Fiscal Responsibility and Reform proposed elimination of step-up basis for capital gains at the federal level.