BOSTON (State House News Service) – With annual revenue estimates surpassing $1 billion per year for a new surtax on the state’s highest earners, policymakers should consider partitioning the money in its own standalone account to ensure it gets spent as voters intended, independent budget experts said Tuesday.
Massachusetts is headed into a new era of state taxation and spending after voters in November approved a 4 percent surtax on personal income above $1 million, a measure that will generate sizable new sums of money meant to go toward transportation and education investments.
Amid polite disagreement over how much the Legislature and Healey administration should expect to collect from the surtax — or whether they can even put a number on the anticipated haul this early in its existence — one top analyst suggested state government guide those dollars toward spending targets along their own clearly delineated, monitored track, rather than lump them in with other tranches of money.
“We’re suggesting one, going forward, as you established several years ago with capital gains revenues, the comptroller certify surtax revenues as they come in so there’s a clear number that’s transparent that we know,” Doug Howgate, president of the Massachusetts Taxpayers Foundation, said at an annual hearing on the state’s revenue outlook. “We would advocate that those revenues be deposited in a separate trust, half for transportation, half for education.”
His recommendation for use of a separate account appears to have traction among the Senate’s budget chief.
Senate Ways and Means Committee Chair Michael Rodrigues told reporters after Tuesday’s hearing that he believes the state should treat revenue from the surtax similar to capital gains tax revenue, a “volatile” source whose amount varies significantly year to year.
Any capital gains tax revenue above an agreed-upon benchmark gets automatically deposited into the state’s “rainy day” long-term savings account.
“I think that would be a good model to go forward with the surtax,” Rodrigues said. “We establish a reasonable benchmark that we can all agree on, and anything above that benchmark goes into a separate fund that’s reserved for the intended use of the surtax, i.e. education and transportation.”
Where lawmakers go from here remains unclear. House Ways and Means Committee Chair Aaron Michlewitz said the analysts who spoke at Tuesday’s hearing presented a “variety of opinions” on how much revenue to expect and the mechanisms by which to use it.
“I don’t think there’s a one-size-fits-all kind of conversation here. I think we’re going to have to really dig deep and figure out exactly what is the best way to approach this,” Michlewitz said. “This is a unique circumstance in terms of building our budget that we haven’t confronted in a while, certainly not just how we implement it but how we decide to allocate it. I think there’s a lot of conversations that still have to be had amongst all the branches.”
Lawmakers have not committed to how they will divide the money between education and transportation investments. The House and Senate budget chiefs also gave slightly different answers Tuesday about whether they would use the new funding entirely to supplement existing allocations or replace some current spending with surtax dollars.
The constitutional amendment voters approved at the ballot box aims to generate new resources for transportation and education, though final appropriation decisions rest with the Legislature.
“It is our intention to be open and transparent and insist that the surtax dollars go to new initiatives in education and transportation,” Rodrigues said. “It’ll be new initiatives — not supplanting — new initiatives in education and transportation.”
Asked if he agreed the money would fully fund new initiatives, Michlewitz replied, “Yeah, I mean, I think so. I think we have to be very cautious because of the volatile nature of this new revenue.”
“We have to be very cautious in terms of setting ourselves up for potential failure down the road if things do not play out year-to-year,” he added. “I think we’re going to have to be kind of creative in terms of what this exactly is going to go toward, but it should go to education and transportation.”
One key uncertainty is how much the state will bring in now that the long-debated surtax is on the books.
Putting the first state-generated projections on the surtax since voters approved it in November, Department of Revenue Commissioner Geoffrey Snyder said his office expects the policy to generate between $229 million and $265 million in fiscal year 2023, then between $1.445 billion and $1.766 billion in fiscal year 2024.
The full fiscal year projection from DOR is lower than the $1.6 billion to $2.2 billion revenue haul the department projected in 2015, before the state’s highest court tossed an earlier ballot question featuring the surtax proposal because of how it was worded.
Alan Clayton-Matthews, a Northeastern University professor and co-editor of MassBenchmarks, said revenue from the measure in the next few fiscal years is likely to be volatile but added that a $1.2 billion average annual estimate “seems reasonable.”
Center for State Policy Analysis at Tufts University Executive Director Evan Horowitz offered lawmakers and new Administration and Finance Secretary Matthew Gorzkowicz his own assessment with a slightly different timeframe.
Over the course of calendar year 2023, Horowitz projected, Massachusetts will haul in about $1.3 billion from high earners subject to the surtax, broken down into roughly $300 million while FY23 is still ongoing and another $1 billion once the budget calendar flips to FY24.
But those figures do not line up exactly with how much Bay State taxpayers will owe under the new tax, according to Horowitz.
Horowitz estimated that the surtax will generate roughly $1.8 billion in liabilities in calendar year 2023. However, he also expects the policy’s implementation will lead to roughly half a billion dollars in lost income tax revenue “as taxpayers who leave the state or engage in tax avoidance will end up skirting both the millionaires tax and the state income tax.”
Others did not share his expectation for taxpayer flight. Clayton-Matthews said other states that have implemented higher tax rates on higher earnings “seems to show the migration effects in terms of bodies leaving are very small.”
Snyder, who served as revenue commissioner under former Gov. Charlie Baker for more than two years and so far remains in that role under Gov. Maura Healey, was more wary about putting any specific figures on households that will circumvent the surtax or leave Massachusetts as a result.
“Fact-based, [it’s] very difficult to tell at this point,” Snyder said when asked if there were indications that wealthy Bay Staters planned to leave to avoid the surtax. “Anecdotally, it is part of the discussion. As we have talked at some of our meetings with some of the outside advisers that we speak to, it is top of mind, and it is something we’ll have to continue to monitor as we go forward.”
“I don’t believe we’ve seen anything in the tax receipts at this point,” Snyder added.
Howgate stood apart from the other analysts who spoke Tuesday, suggesting the volatility inherent in the new revenue source makes it too difficult to put a number, at least for now, on how much state government is likely to collect.
“As we’ve seen over the last three years, projecting total budget revenues — so $40 billion — is a challenging enterprise looking 18 months in the future,” Howgate said. “The surtax is essentially taking the most volatile revenues of that $40 billion and separating those out to be projected on its own, which means that in any given year, our ability to pin the tail on the donkey in the right place and get that number right is going to be even more limited than it is on the big-picture budget.”
For now, Howgate said, budget-writers have very little information on which to base their expectations for surtax hauls. He estimated roughly one-third of total surtax revenue would come via weekly withholding, which theoretically started this month but is likely to “really kick in more in the latter parts of the year as people continue to exceed that threshold.”
The remaining majority of the dollars would come from estimated payments. Howgate said other non-withholding revenue sources like capital gains are based on the prior year’s tax liability, pushing out the date by which a clear picture of surtax money might emerge.
“You are unlikely to see much surtax activity in estimated payments for the remainder of this calendar year, and in fact, the first scheduled payment where we would reasonably expect to see most of our tax revenue come in is the April 2024 estimated payments and tax returns,” he said. “What that means is you’re going to lack real information on how we’re doing compared to [the] estimate until May of next year, 10 months into the fiscal year.”
Horowitz cautioned lawmakers that it would be “risky to spend all estimated dollars” that will be newly available via the surtax given the uncertainty early on in its implementation.
He suggested that relying on between $750 million and $1 billion of surtax money in FY24 would be “safe and sensible,” and called for any revenue collected above that total to be dumped into a savings account to “smooth future spending.”
In the longer term, Horowitz urged state government to create a surtax savings and stabilization plan, akin to the approach policymakers take with capital gains tax revenues.
“And given how important it is to track and understand the full economic impact of the millionaires tax in the years ahead, it would be extremely valuable for DOR to expand the information it provides on very high earners in Massachusetts — and to receive dedicated funding to make this happen,” Horowitz wrote in his testimony.
One way to do that, which Horowitz said might be “simplest,” would be to follow the Internal Revenue Service’s lead and “mimic” their income statistics, which are designed to protect taxpayer privacy.