A proposed constitutional amendment that will provide for a 4% surtax on individual taxpayers that earn $1 million or more per year will advance to the ballot in November 2018.

Background

RaiseUp Massachusetts, a progressive coalition of community organizations, religious groups, and labor unions began this initiative in 2015 by securing more than 65,000 signatures in order to compel a vote in a state constitutional convention. For the proposal to move to the ballot, it must receive at least 25% favorable support in two successively elected sessions of the state's constitutional convention. Subsequently, in May 2016, the Massachusetts House and Senate voted 135-57 jointly in favor to advance the proposed amendment to article XLIV of the Massachusetts Constitution by adding the following paragraph:

To provide the resources for quality public education and affordable public colleges and universities, and for the repair and maintenance of roads, bridges and public transportation, all revenues received in accordance with this paragraph shall be expended, subject to appropriation, only for these purposes. In addition to the taxes on income otherwise authorized under this Article, there shall be an additional tax of 4% on that portion of annual taxable income in excess of $1,000,000 (one million dollars) reported on any return related to those taxes. To ensure that this additional tax continues to apply only to the commonwealth's highest income residents, this $1,000,000 (one million dollar) income level shall be adjusted annually to reflect any increases in the cost of living by the same method used for federal income tax brackets. This paragraph shall apply to all tax years beginning on or after January 1, 2019.

Most recently, in June 2017, the Massachusetts House and Senate voted in a second consecutive constitutional convention 134-55 to place the proposed amendment before voters on the 2018 ballot. Accordingly, barring any successful legal challenge, Massachusetts voters will have the chance to vote for the change in November 2018. If approved by voters, the change would be effective January 1, 2019. Early polling found nearly 70% of voters favor the amendment.

Implications

Despite the apparent popularity of the proposed amendment, both legal challenges to the proposed amendment as well as implementation concerns of the amendment, if adopted, exist. Some industry advocacy groups have raised concern about the ballot initiative, and are coordinating legal efforts with law firms to mount legal challenges to the validity of the amendment, including concerns about the manner in which this tax will be applied, how the revenue will be earmarked for specific purposes, and application of the tax to a very narrow band of taxpayers.

Notable concerns over the proposal include that the proposal seeks to explicitly implement tax law through the state's constitution and outside of the bodies of Massachusetts legislature. Thus, there would be no debate in the chambers of the House or Senate, and no ability to add, change, or delete language to confirm or clarify the adopted statutory language.

Additionally, the current language, on its face, raises concerns of clarity. For example, although the language implies applicability to Massachusetts residents only, the vague wording could leave room for expanded interpretation. Moreover, the language contains several terms and concepts that are undefined, including the term "annual taxable income." The applicable tax base subject to the 4% surtax becomes even more complicated when one considers that Massachusetts has two different tax rates applicable to two different tax bases: 5.1% on "all other income," and 12% on short-term capital gains and other certain items of income. Does the additional 4% tax apply if each class of income (the 5.1% income base and the 12% income base) is individually less than $1 million?

Advocacy groups and lawyers have also raised concerns that the proposed amendment would be contrary to the existing constitution in two key areas. First, the proposed amendment would add language to Article XLIV that, itself, protects residents from imposition of different tax rates on income earned from the same class of property.

Secondly, it is argued that the manner in which the proposed amendment would appropriate revenues to education and transportation is contrary to Article XLVIII, which in part governs the ballot initiative process and prohibits, among other items, the "specific appropriation of money from the treasury of the commonwealth … " Additionally, the wording "subject to appropriation" in the proposed language may be open to interpretation.

Finally, concern has been expressed about the projected narrow impact of the tax. The Massachusetts Department of Revenue expects the tax will apply to only 19,600 taxpayers (out of nearly 4 million, or 0.5%). Moreover, only 900 taxpayers (making $10MM or more annually) would pay more than half of all taxes collected under the amendment. Numerous industry groups suggest that these high-income earners, more than most, have the ability to relocate outside of Massachusetts, thereby reducing the expected $1.9 billion in annual tax revenue proponents of the amendment have projected from enactment.

We will continue to monitor future developments regarding this amendment, including any legal challenges, over the next several months before its projected placement on the commonwealth's November 2018 ballot.

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