On June 22, 2022, the Supreme Judicial Court of Massachusetts in Anderson v. Attorney General (Anderson II) removed the last remaining legal hurdle to a November 2022 ballot question related to the so-called millionaires’ tax. The ballot question will ask voters whether to approve an amendment to the Massachusetts Constitution that would impose a 4% surtax on individual taxable incomes over $1 million.
Having survived the last remaining legal challenge, the fate of the surtax will be in the voters’ hands this November. Even though the new proposed constitutional amendment is more narrowly focused than the amendments that voters rejected on five previous ballots, there is still plenty of opposition. Opponents to the surtax focus on the following themes:
- The proposed amendment is overly rigid because it does not allow for legislative adjustments.
- Increasing the tax burden on high-net-worth taxpayers will result in an exodus of job creators from the commonwealth. The millionaires’ tax is likely to affect more than just millionaires—many homeowners, retirees, and owners of passthrough businesses will also be affected.
- Increasing tax burdens without a corresponding need for additional revenue is fiscally irresponsible.
Clients who are concerned about the surtax should not take too much comfort in the fact that five previous graduated income tax ballot questions failed. Each of the failed measures would have granted the legislature authority to enact a broad-based graduated income tax regime akin to the federal system. In contrast, the surtax is a much more targeted tax increase that affects only 0.6% of taxpayers and is likely to have more support from working- and middle-class taxpayers. Supporters of the surtax focus on the following themes:
- The additional revenue would advance racial and economic equity.
- It would also fund much-needed improvements to school systems in lower-income areas and crumbling transportation infrastructure.
- Fears regarding the exodus of high-net-worth taxpayers are greatly exaggerated.
A constitutional amendment to authorize the surtax is required because Article 44 of the Amendments to the Massachusetts Constitution provides that the income tax “may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property.” Unlike special tax rates such as the 12% rate on short-term capital gains, the surtax is imposed on different categories of taxpayers rather than different categories of property.
There have been six unsuccessful attempts since 1915 to amend the Massachusetts Constitution to allow for the imposition of a graduated income tax. The first five attempts were ballot questions that voters rejected, each by a significant margin; the sixth attempt was an initiative petition that never appeared on a Massachusetts ballot because of the 2018 SJC decision Anderson v. Attorney General (Anderson I).
In this case, the SJC held that an initiative petition proposing that a 4% surtax on individual taxable incomes over $1 million violated the mutual dependence requirement for amendments proposed in the petition. The SJC agreed with the Anderson I plaintiffs that the imposition of a graduated income tax and the earmarking of revenue from this new tax for public education and public transportation were insufficiently related.
On Jan. 18, 2019, Rep. James O’Day (D) proposed an amendment to the constitution that mirrors the initiative petition that the SJC invalidated in Anderson I six months earlier. Because the mutual dependence requirement does not apply to amendments proposed through the legislative process, the plaintiffs in Anderson II were unable to pursue a challenge to the relatedness of the surtax and the desired spending measures. Instead, they argued that the summary of the proposed constitutional amendment was misleading to voters because the legislature could “use the additional revenues raised by the new tax to increase spending on whatever it wants.” The SJC determined that the attorney general’s summary was not misleading because it “track[s] the basic language of the measure” by accurately describing the revenue subject to appropriation and informing voters that the expenditure for the measure’s stated purposes is subject to legislative approval.
For clients who consistently report more than $1 million in annual taxable income, the easiest advice is the same as the guidance we routinely provide to high-net-worth clients who have a significant presence in the commonwealth. If possible, take immediate steps to abandon Massachusetts domicile and adopt domicile in a state with no individual income tax such as Florida or New Hampshire.
If these clients own real estate in Massachusetts, we can advise to either to sell it in 2022 (as the effective date of the surtax amendment is Jan. 1, 2023) or make sure that they do not spend more than 183 days in the commonwealth in 2023 or any subsequent calendar year. This isn’t a new strategy, and there are many high-net-worth clients who, for business or personal reasons, will be unwilling to abandon their domicile and reduce their number of days of physical presence in the commonwealth despite the additional tax cost.
Individuals who might be subject to the surtax because of a one-time sale of a personal residence or flow-through business in 2023 or later may, if possible, move up the closing date to the 2022 tax year. Other strategies for these taxpayers might include:
- Reinvesting the capital gains on the sale of the business or real estate located in Massachusetts in a qualified opportunity zone fund under IRC Section 1400-Z;
- Restructuring the sale of a Massachusetts business as a tax-free reorganization;
- Exploring whether filing as “married, filing separately” offers any overall tax savings compared to filing as “married, filing jointly”; and
- Gifting appreciated real estate or business assets to an irrevocable trust such as a spousal lifetime access trust, which will alleviate concerns regarding the surtax, effectuate an “estate freeze,” and enable both spouses to take full advantage of their federal lifetime gift and estate tax exemptions.
Massachusetts residents should watch this issue closely and postpone any final decisions regarding their domicile or asset sales until after the election on Nov. 8 if they can. Even though the election is only a little more than a month away, it is still too early to make irrevocable decisions on the basis of a surtax whose fate is uncertain.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Matthew A. Morris is a tax partner at Boston law firm Sherin and Lodgen who represents businesses and individuals in a broad range of federal, state, and international tax planning and tax controversy matters.
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