The proposed millionaires tax in Massachusetts would “adversely impact” a significant number of small business owners, ultimately hampering the state’s economic recovery from the coronavirus pandemic, according to a new study published by Pioneer Institute.
A proposed state constitutional amendment would add a 4% surtax to all annual income above $1 million.
If the surtax passes, it would apply to as many as 13,430 of the state’s pass-through entities — which are often small businesses structured as S corporations, sole proprietorships and partnerships.
Proponents of the tax argue the surtax would only affect Massachusetts’ highest-paid corporate executives, but many independent business owners would also be directly affected, according to Pioneer.
“Promoters of the surtax always point to its impact on some nebulous ‘millionaire,’ ” said Pioneer Institute Executive Director Jim Stergios. “The tax will impact many more people and small businesses, and through them, tens of thousands of employees.”
Before the pandemic, Massachusetts saw significant growth driven by pass-through entities, according to Pioneer’s study.
From 2010 to 2018, the number of pass-through employers in the state grew by 11.3%. By 2018, they accounted for 57.1% of Massachusetts’ private sector workforce.
“The past year has been a historically difficult time for a lot of ‘Main Street’ business owners in Massachusetts,” said Nina Weiss, who wrote the Pioneer report with Greg Sullivan. “This is a time when we should be prioritizing the resilience of the state’s economy and getting people back to work, not raising taxes on small businesses.”
The millionaires tax could also deter future entrepreneurs from starting businesses here, they write in the report.
Restaurants and hospitality firms are among the various pass-through entities that could be affected by the proposed surtax.
“Although there does not seem to be any data on the precise number of restaurants or hospitality enterprises in Massachusetts that are pass-through businesses with more than $1 million in income, it is reasonable to assume that even these higher grossing entities have struggled during COVID-19,” the report reads. “Thus, it would be both risky and unfair to subject these businesses to a new tax once they begin to recover, which could be as late as 2023, precisely when the surtax — if passed — would kick in.”
Lawmakers this session are likely to advance a ballot initiative that would propose a constitutional amendment to impose a 4% surtax on people earning over $1 million.
Proponents of the tax — who call it the “Fair Share Amendment” — say the measure could bolster education and transportation funding by $2 billion.
Residents could vote on the ballot question in November 2022.