Massachusetts Voters Approve ‘Millionaires Tax’ As Californians Reject An Income Tax Hike On High Earners

In the 2022 midterm elections, residents of California, like those of Massachusetts, voted to put Democrats in commanding control of their state government. Yet these two left-leaning electorates rendered opposing verdicts on similar tax measures seeking to raise state income tax rates on upper income households.

With 57% voting No, California voters resoundingly defeated Proposition 30, a ballot measure that would’ve added a new, 15.05% top marginal state income tax rate applying to income above $2 million. At 13.3%, California already levies the highest top personal state income tax rate in the country.

With the defeat of Proposition 30, upper income filers and thousands of small business owners avoided being hit with a 1.75 percentage point, 13% increase in their top marginal state income tax rate. According to IRS data, in 2019, the most recent year for which data is available, more than 86,000 pass-through business owners filed under the individual income tax system in California and have income above $1 million. How many have income above $2 million is not delineated by the IRS data, but it’s likely ten of thousands of small business owners who would’ve seen their job creating and sustaining capacity diminished had Proposition 30 passed.

The ride-sharing company LyftLYFT
was the primary financial backer of Proposition 30, which directed the additional funding to the buildout of electric vehicle infrastructure. Had Proposition 30 been enacted, the new 15.05% income tax rate would’ve raised an additional $3 billion to $4.5 billion annually, according to projections from the Legislative Analyst’s Office.

Governor Gavin Newsom (D), along with the California Teachers Association, urged Californians to reject Proposition 30, in part, because it would make revenue collections less predictable. “California’s tax revenues are famously volatile, and this measure would make our state’s finances even more unstable,” Newsom said of the proposed income tax hike.

“Proposition 30 is a special interest carve-out — a cynical scheme devised by a single corporation to funnel state income tax revenue to their company,” Newsom said. “Californians should know that just this year our state committed $10 billion for electric vehicles and their infrastructure.”

“The election results are an unfortunate setback for the climate movement,” a Lyft spokesman said the day after the election. “Millions were spent by the opposition to confuse and misguide voters, however we are undaunted … we remain committed to achieving our collective climate goals.”

While Golden State voters rejected an income tax hike on high earners, in Massachusetts another “millionaires tax” proposal, Question One, passed with nearly 52% support. Question One is a constitutional amendment that will move Massachusetts from a flat to progressive income tax structure. Massachusetts currently has a 5% flat state income tax rate and passage of Question One will create a new 9% rate on income above $1 million dollars.

Question One is projected to raise an additional $1.5 billion annually for state coffers. Whereas the progressive tax hike rejected by Californians would’ve been used to fund EV infrastructure, the income tax increase approved in Massachusetts will use the additional funds to boost education and transportation spending.

While the state teachers union was a major opponent of the defeated California income tax increase, they were the top proponent and funder of the Massachusetts income tax hike. The California Teachers Association spent $5 million to defeat Proposition 30. The Massachusetts Teachers Association, meanwhile, spent $15.5 million in support of Question One. The American Federation for Teachers also kicked in $6.7 million to help pass the income tax hike.

While this tax hike was sold to Bay State voters as a way to make the rich pay more, small businesses will also be hit with this tax increase. According to IRS data, more than 19,000 owners of sole proprietorships, LLCs, partnerships & S corporations that filed under the personal income tax system in Massachusetts in 2019 would’ve be hit by the 44% income tax rate hike imposed by Question One had it been in effect at the time.

In Moving From Flat To Progressive Income Tax, Massachusetts Becomes A National Outlier

Question One marks the sixth time in the past 50 years that a measure seeking to move Massachusetts to a progressive income tax has been put on the ballot. The previous efforts occurred in 1962, 1968, 1972, 1976, and 1994. In 2022, Question One became the first progressive income tax proposal to receive voter approval.

By moving from a flat to a progressive income tax structure, Massachusetts is bucking a national trend, as more states have been moving in the opposite direction, going from a progressive to a flat income tax. In September, Idaho became the fifth state in the past two years where lawmakers enacted legislation moving from a progressive to a flat state income tax structure. Other states where lawmakers have passed legislation to move from a progressive to flat income tax over the past two years include Georgia, Mississippi, Iowa, and Arizona.

North Dakota Governor Doug Burgum (R) has a proposal to move his state to a flat tax. Until passage of Question One, enactment of Governor Burgum’s plan would’ve made North Dakota state number 25 with a flat state income tax rate. Approval of Question One, however, will reduce the number of flat tax states by one, bringing it down to 23 currently. That means enactment of the flat tax proposal pending in North Dakota would get the total number of flat tax states back to 24.

One of the now 23 states that has a flat tax, Colorado, had an income tax cut on the ballot in the 2022 midterm elections. Proposition 121, which was approved with 65% of the vote, will cut Colorado’s flat income tax rate from 4.55% to 4.40%. Passage of Proposition 121 marks the second reduction in the state’s flat income tax rate to be approved by Colorado voters in the past two years.

There are a number of possible take-aways from the results of these 2022 ballot measures. It’s clear that it’s very helpful for progressive tax hike initiatives to have the teachers unions on board, at least in states as blue as California and Massachusetts. Another potential take-away for many will be that, while the 2022 midterm elections went much better for Democrats than was expected going in, the results do not appear to represent an endorsement of progressive policies, even in Democratic strongholds.