Will the ‘Millionaires’ Tax’ Hobble the Massachusetts Economy?

This past fall, Bay State voters passed the so-called millionaires’ tax on the promise of giving the economy a much-needed boost. Here’s why it could send a tidal wave of cash out-of-state and shrink local resources instead.

Illustration by Mark Matcho

Erin Calvo-Bacci is worried. At age 52, with the youngest of three daughters now in high school, she expects the eventual sale of her business—the specialty wholesale chocolate manufacturer CB Stuffer in Swampscott—to provide her nest egg when she is ready to retire. Yet thanks to the passage in November of the Fair Share Amendment (FSA)—also known as the millionaires’ tax—that nest egg now looks to be far too small. As a result, she says, “I’ve got to be on a five-year plan of getting out of Massachusetts.”

She’s hardly alone. One business owner recently told me that the millionaires’ tax was a significant reason he made Florida his primary residence last year. He, like Calvo-Bacci and many others, was already antsy about the state’s high estate and business taxes as well as the rising cost of living, driving him toward friendlier pastures. Meanwhile, wealth advisers and business consultants throughout the state say that many of their clients are looking seriously into moving beyond Massachusetts’ borders. Some, they say, will definitely move, while others have commissioned studies in preparation to flee in a few years when current leases or other obligations run out. With the late-session failure of a tax reform package happening just before voters okayed the millionaires’ tax, the tipping point seems to have finally arrived. “All my financial adviser pals and I are telling people to leave the state,” says Susan Kaplan of Newton’s Kaplan Financial Services. “Do not hold philanthropic holdings here; do not start a business here. Do not live in this state.”

It’s far too early to guess how many residents will follow that advice. Very few are willing to discuss their plans on the record, citing concerns of retribution or loss of business, particularly after the heated rhetoric of last year’s political campaign to pass the tax. Still, the campaign is over, and the political question is moot: The deed is done, and an extra 4 percent tax on annual income above the million-dollar mark is now etched into the state constitution. Taxation in the state will become a little more progressive; education and transportation should get a little more funding. But the fallout remains relevant. Not just because it affects the amount of new tax revenue the FSA can actually collect but because of the potential ripple effects through Massachusetts’ economy if current and future high earners and entrepreneurs shun the Bay State altogether.

It’s not difficult to imagine why. You can reasonably bemoan the existing extreme-wealth differentials, but they do exist—and they mean that a fairly small number of households contribute disproportionately to consumer spending, business expansion, and employment. Restaurants, clothing stores, dry cleaners, cleaning services, and many others depend on them. As do others, including charities and philanthropies. Calvo-Bacci’s company, for instance, recently partnered on a fundraiser with elementary schools in Medford and Reading. “Not only could you see the export of state income tax to other localities, [but] these people create jobs and give philanthropically,” says Bruce Percelay, chairman of real estate investment firm the Mount Vernon Company. “Who are the major donors to hospitals and educational institutions? The people you are penalizing” with the millionaires’ tax. Another Boston business consultant—one who voted for the amendment but now sees the downside as his clients’ interests shift elsewhere—took it a step further, saying, “CEOs I work with are moving. Half or more of their charitable giving is already in Florida.”

If even a small percentage of high earners and entrepreneurs leave the state, shift their business investments elsewhere, or choose other states in which to launch their startups, the effects start to add up—and spread—quickly. An analysis from the business-friendly Tax Foundation suggests that the state’s gross domestic product (GDP) will fall by roughly $6 billion by the end of 2025—a contraction of nearly $6 million a day for three years.

Maybe, as some argue, those moneyed families—especially the 2,000 or so who regularly report annual earnings of $5 million or more—are just bluffing and will ultimately stay put. That’s apparently what voters were willing to wager on. “It’s a gigantic bet on a very small group of people,” says one business consultant. He’s crossing his fingers, but he can’t help but wonder whether the new tax will do more harm than good.

Scroll through the websites of Massachusetts financial advisers, and it’s impossible to miss all the recently added posts discussing tax-avoidance tactics in light of the millionaires’ tax.

Scroll through the websites of Massachusetts tax planners and financial advisers, and it’s impossible to miss all the recently added posts discussing tax-avoidance tactics in light of the millionaires’ tax. Those firms knew that there would be a demand for new strategies—after all, they’d been hearing it from clients throughout the whole campaign. And it’s not just a select handful, they say. They’re hearing it from lots of clients. Lots.

Undoubtedly, high earners will find ways to lessen their new tax burden. Heck, they already have. Jody King, vice president and director of wealth planning at Fiduciary Trust Company, says that some of her clients immediately converted funds from traditional IRAs to Roth IRAs before the end of 2022 in order to pay the resulting tax before the new law took effect. Other experts have been counseling the same.

Small-business owners are also acting quickly. “They are already talking to tax preparers, talking to legal experts, so that they don’t trigger the tax,” says Chris Carlozzi, Massachusetts state director for the National Federation of Independent Business. His group responded to the demand by offering an informational meeting to members soon after the new tax passed. The Retailers Association of Massachusetts is also seeing the same concern, says its president, Jon Hurst. “Eighty percent of our members are pass-through businesses, so personal and business income are one and the same.”

All of this chatter includes an explicit option to hightail it out of Massachusetts. How many will actually go is a bit of a Rorschach test question. And to me, that amorphous ink blot looks a little like former Governor Charlie Baker.

A month after the FSA passed—over his opposition—Baker announced that upon ending his second term as governor, he would start a new job as president of the National Collegiate Athletic Association (NCAA). He reportedly does not plan to actually take his talents to Indianapolis, where the organization’s sleek campus is located. Instead, if he really stays put at his home in Swampscott, it will be proof of concept for what FSA proponents have argued: that high earners will stay put, held fast by family, community ties, business networks, and a love for all that Massachusetts offers. After all, says Phineas Baxandall, policy director at the FSA-supportive Massachusetts Budget and Policy Center, “Place still really matters.”

That’s the theory underlying a Tufts University analysis that estimates the state will lose only 500 wealthy families because of the additional tax. But the pro-business Tax Foundation in Washington, DC, puts the figure at more than 1,700 people—and it’s not hard to imagine Baker ultimately becoming one of them. If, for instance, the NCAA pays Baker the same $3 million salary it paid his predecessor in the position, maintaining his Massachusetts domicile means that Baker will owe $230,000 in state taxes. That’s $80,000 more than before the FSA and a whopping $133,000 every year more than he would pay in Indiana if he moves. Add to that a 9 percent tax on any investments and other earnings, and it adds up to a lot of cash to heave into the fireplace every year.

Former Boston Mayor Marty Walsh, who is taking a job based in Toronto as head of the NHL Players’ Association, faces a similar decision. So does Patriots owner Robert Kraft, who could easily claim his new Palm Beach, Florida, condo as his primary residence and save a whole lot of money. And there are plenty more people out there of lower profile, but whose absence from the state would similarly detract from overall civic life in Massachusetts. The millionaires’ tax, Kaplan says, “is incredibly short-sighted and will cause an even greater exodus of wealth from the state.”

The new tax, she says, is already sparking rumblings across the country that so-called Taxachusetts is not a smart place to start or expand a business. The businessman I spoke with who moved to Florida last year agrees. “Put yourself in the shoes of an entrepreneur,” he says. “Would I incorporate in Massachusetts? No.”

The new tax, says one financial adviser, is already sparking rumblings across the country that so-called Taxachusetts is not a smart place to start or expand a business.

It’s easy to argue that the Taxachusetts label is not the reality but merely the twisted perception of the state’s embittered wealth holders. And that argument might be right—but if high earners believe they’re getting screwed, they’ll behave as if they are, whether their point of view comports with objective reality or not.

So far, my conversations suggest that an awful lot of them ended this election cycle convinced that they’re getting screwed. More than one wealthy Bay Stater, not wishing to be named, told me they find the new tax “punitive.”

That sense is elevated by the seeming lack of need for the revenue. Massachusetts tax receipts came in so high last year that the state mailed refund checks to residents before the ink was dry on the FSA. It came just a few months after a package of tax reforms championed by then-Governor Baker failed.

To political observers, the bitterness that high earners feel toward the FSA seems familiar, akin to any number of issues in recent years, from Obamacare to illegal immigration. For some, the opposition may be tribal, a grievance based on their beliefs rather than objective observations. Others, perhaps, took the Question 1 vote as confirmation that their progressive neighbors simply don’t want them around.

Easing other tax burdens could go a long way toward quelling that bitterness. Current Governor Maura Healey has proposed a new set of tax reforms, including two geared toward pleasing high earners: raising the estate tax threshold from $1 million to $3 million and lowering the short-term capital gains tax from 12 percent to 5 percent.

Initial Beacon Hill response appears mixed at best. Similarly, Democratic lawmakers don’t seem to be in a rush to jump in with tweaks to the FSA itself; for instance, exempting some residents from the one-time effects of selling their home or—as in the case of Calvo-Bacci—their business. “It’s going to take a couple of years for us to know the impacts” of the new tax, says Aaron Michlewitz, the House Ways and Means chairman, suggesting that he will want to take time to assess before backing changes to the FSA. Though he does not believe the intent was to “go after one-time millionaires” selling their home or small business, “We do have to see it through” now that voters passed it, he says.

Those affected by the new tax, however, as well as high earners of the future, might choose not to stick it out. Calvo-Bacci sees it with her two oldest daughters, one who is about to graduate from college in Tennessee and the other who goes to school in Rhode Island. The one in Tennessee, she says, “is not coming back.” The one in Rhode Island, she says, “has been doing the numbers with us about living in Massachusetts. It’s just too cost-prohibitive.”

First published in the print edition of the April 2023 issue with the headline, “How to Lose $6 Million a Day.”