Massachusetts is a cautionary tale for voters considering taxes on the wealthy on Tuesday: The tax base isn’t a captive audience.
Californians will decide whether to impose a supposedly one-time 5 percent tax on the wealth of residents worth more than $1 billion. Washington voters will decide whether to repeal their state’s new 9.9 percent tax on annual household income above $1 million.
The Bay State offers a warning about treating wealthy residents as an inexhaustible source of revenue. Massachusetts voters approved a constitutional amendment in 2022 imposing an additional 4 percent tax on annual income above $1 million. The tax has raised billions for education and transportation. The costs took longer to appear.
Internal Revenue Service data show that Massachusetts had almost 94,000 tax returns reporting at least $1 million of income in 2021. By 2023, that population had fallen by roughly 12,700, or 13.5 percent. During 2023, the first year of the surtax, Massachusetts lost a net $4.2 billion in adjusted gross income to interstate migration. High earners accounted for a disproportionate share of the lost income.
Most families cannot uproot themselves easily over a tax increase. Millionaires and billionaires have more flexibility, and federalism gives them alternatives. Massachusetts competes with New Hampshire and Florida. California competes with Nevada and Texas. Washington competes with states that impose no individual income tax.
California is discovering this the hard way even before the vote on Proposition 40. At least seven billionaires left the state between when the wealth tax was proposed and the end of last year, according to an October working paper by economists Benjamin Jaros and Joshua Rauh at Stanford’s Hoover Institution. Together, the departures removed around $570 billion — nearly 30 percent — from the proposed wealth-tax base. Jaros and Rauh estimate that the tax imposed by Proposition 40 would collect roughly $30 billion, less than a third of the roughly $100 billion its boosters have projected.
While this wealth tax would technically be collected only once, income taxes arrive year after year. California’s billionaires currently contribute an estimated $3.3 billion to $5.8 billion annually in state income taxes. After estimating the present value of income-tax revenue permanently lost when billionaires leave, Jaros and Rauh calculate that Proposition 40 would leave California nearly $39 billion poorer on net. They ran 100,000 simulations using different revenue and discount-rate assumptions. California lost money in 85 percent of them.
The supposedly temporary nature of the tax is hardly reassuring. California has been down this road before. Voters approved higher income-tax rates in 2012 as a temporary measure, only to extend them four years later.
The Golden State is unusually dependent on a small population of affluent taxpayers and volatile capital-gains income. The richest 1 percent provide roughly 40 percent of California’s personal income-tax revenue. Losing even a handful can punch an enormous hole in future collections.
Their departure also takes more than individual income-tax payments. Entrepreneurs create companies. Investors finance start-ups. Wealthy residents employ people, purchase services and make charitable contributions.
Nor should Californians assume “one time” means the political appetite for wealth taxes disappears. Phineas Baxandall of the Massachusetts Budget and Policy Center, a prominent supporter of Massachusetts’s millionaire surtax, was recently asked about bringing a California-style wealth tax to Massachusetts. “There’s nothing magical about the number 1 billion,” he told the Boston Globe. “Maybe the cutoff is 100 million.”
That’s how the dynamic works: Establish the machinery and political precedent for confiscating wealth, and today’s extraordinary levy on billionaires can become tomorrow’s argument about whether $100 million, or even $1 million, is a more appropriate cutoff.
Washington voters confront the same economic principle in a different form. Their state government imposed a disastrous 9.9 percent tax eight months ago on annual household income above $1 million. Voters now have a chance to reconsider. Initiative 645 would repeal the millionaire tax. Unions have poured millions of dollars into defeating the initiative.
Washington has long competed for workers, entrepreneurs and companies partly by not taxing individual income. The new levy changes that proposition for precisely the people with the greatest ability to choose where they live and invest.
Massachusetts hasn’t collapsed since imposing its millionaire surtax, but think of all the taxable income, investment and population the state will miss out on in the decades to come. This is a feature of the American system. States compete for residents, entrepreneurs and capital, just as businesses compete for customers. Governments offer different combinations of taxes and services, and the people get to decide whether the deal is worth the price.
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