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Massachusetts Tax Competitiveness Drops to Fifth Worst in the Country, Report Finds

The business tax climate in Massachusetts has declined significantly over the past year, with the Commonwealth dropping to the fifth worst state in the country for competitiveness, according to a new report from a national tax watchdog.

Massachusetts had the steepest fall from last year in the nation, dropping 12 spots to 46th for overall taxation in the 2023 State Business Tax Climate Index, a ranking published by the Tax Foundation that compares state tax systems.

“That means we are overtaxing our employers and our residents, both,” said Jon Hurst, president of the Retailers Association of Massachusetts. “To be in the bottom five states, it’s not a good sign to either our tax-paying families or to employers, current or prospective. We’ve got to work on this.”

A driver behind the nosedive in tax competitiveness, the Tax Foundation found, is the state’s new Fair Share Amendment – or Millionaire’s Tax – which taxes incomes over $1 million an extra 4%.

“While the $1 million threshold at which the surtax kicks in is indexed to inflation, the surtax imposes a sizable marriage penalty that the Commonwealth lacked previously,” authors wrote in the report which came out last week. “This policy change represents a stark contrast from the recent reforms to reduce rates while consolidating brackets in many other states.”

The crumbling tax system should not be a surprise, said Paul Craney, a spokesman for Massachusetts Fiscal Alliance, a staunch opponent of the Millionaire’s Tax. He called out proponents who pledged that the surtax would strictly apply to individuals with an income of over $1 million.

“With a flip of a switch, the legislature lowered that threshold to $500,000 for married people and the Tax Foundation is predicting a clear negative outcome from this,” Craney said in a statement.

Hurst, whose organization represents 4,000 businesses in the state, told the Herald on Friday that people and businesses alike are continuing to leave Massachusetts due to taxation.

Massachusetts is the fourth worst state in the country when it comes to out-migration, behind only California, New York and Illinois, according to data gathered earlier this year by Pioneer Institute, an economic policy think tank.

The Millionaire’s Tax has exacerbated the years-long problem, and former Celtics player Grant Williams used it as motivation to sign a four-year, $54-million contract with the Dallas Mavericks over the summer. If he stayed in Boston, the surtax would’ve reduced that amount to $48 million over the four years, he told The Athletic.

The Tax Foundation also called out a payroll tax that went into effect this year in Massachusetts’ poor ranking. The organization also found that the state dropped 33 spots from the 11th best state for individual taxes to the sixth worst.

Two glaring challenges facing small businesses across the Bay State, Hurst said, are its high unemployment and health insurance costs, both of which are the worst in the nation, according to the Tax Foundation.

Hurst is calling on state lawmakers to create more flexibility for small businesses on health insurance instead of imposing mandates and restrictions so they can be competitive with “big, self-insured businesses.”

Gov. Maura Healey signed a $1 billion-a-year tax relief bill earlier this month that Hurst believes will only go so far.

The package cuts the short-term capital gains tax from 12% to 8.5%, a business-backed move that has riled progressives who argue it gives a break to the wealthy. The compromise will cost the state $561 million in fiscal year 2023 and $1 billion a year starting in fiscal year 2027.

It also includes boosts to the rental deduction cap, a tax credit for a dependent child, disabled adult, or senior, and the statewide cap for a housing production program. The bill excludes estates valued up to $2 million from the estate tax by allowing for a uniform credit of $99,600.

“It’s going to help,” Hurst said, “but frankly, I think it’s a down payment on more action that has to come to make Massachusetts welcoming to investment, welcoming to entrepreneurs and to make sure that small businesses and consumers alike can be prosperous in the Commonwealth.”

Source : BostonHerald