Millionaire’s Tax targeted to close loophole, too soon critics say

The groups behind the state’s new Millionaire’s Tax say lawmakers need to get onto the same page regarding a loophole that could allow thousands of high-income taxpayers to avoid paying hundreds of millions in surtaxes, while tax watchdogs say it’s too soon to make changes to a brand new law.

Raise Up Massachusetts, the coalition behind an amendment that taxes incomes over $1 million an extra 4%, says that a proposal by the state Senate to eliminate a “single-filer loophole” allowing couples to file a joint federal tax return but separate returns in Massachusetts needs to be taken up by both chambers of the Legislature.

“Some of the state’s richest taxpayers are using a tax loophole that exists only in Massachusetts to double their exemptions under Fair Share, costing the state as much as $600 million a year,” Andrew Farnitano, a spokesperson for the group, told the Herald. “That’s up to $600 million every year that would otherwise be available to fund schools, repair roads and bridges, make public colleges more affordable, or help get the MBTA back on track.”

Farnitano’s figures come from a mid-July report by the state’s Department of Revenue, in which the state contends the amendment and Massachusetts tax laws may leave enough room for high-income filers to see a massive benefit to filing their state returns separately.

“DOR estimates the maximum potential revenue impact to be between $500 million to $600 million,” the department wrote, stressing that the effect may be less than that.

The Fair Share Amendment — or Millionaire’s Tax — approved by the voters last November, also declared that any money raised should go toward education and transportation costs. Senate bill S.2406 would amend the tax code to require a married couple to file a joint return for any year in which they file a joint federal income tax return.

The difference, according to Beth Kontos, president of the state’s arm of the American Federation of Teachers, would be hundreds of millions that could go toward badly needed upgrades to the Commonwealth’s school buildings and improvements in the classroom experiences of students.

“Some of our schools are 150 years old and barely have functioning windows,” she said. “These buildings need to be rebuilt. When you are a wealthy community you can raise the funds and it’s not as hard. When you are in a community where so many people are still struggling it’s not so easy.”

Kontos said programs like universal school meals and subsidized early childhood education are fundable, but not if the state’s new tax can’t help fill gaps in the budget.

“We have made better investments than other states, but we still aren’t doing everything we can. We’re leaving money on the table that could really close the equity gap,” she said.

The state’s beleaguered transportation system is billions of dollars away from being the sort a world-class city deserves and needs, but the hundreds of millions that could be lost will not help the situation outside of Boston, transit advocates warn.

“Everyone is very well aware of the challenges the MBTA is facing right now and the literal billions of dollars of work they need to do. But we have 15 regional transit authorities across the state. Many do not have money to run evening and weekend service,” Stacy Thompson, executive director of the LivableStreets Alliance

The Massachusetts Taxpayers Foundation is warning that any change to the tax code would be premature, considering the surtax hasn’t been in effect for a full year.

“If we want to have a discussion about how to implement the surtax in a way that’s going to have the least negative economic impact on Massachusetts and make sure that we implement it in the best way, we can have a holistic conversation about a myriad of potential ways to clarify and clean up the surtax. Selectively picking one, seven months in, to expand the scope to folks who are closest to the margin of where the surtax kicks in doesn’t make a lot of sense,” MTF President Doug Howgate told the Herald.

According to Howgate, it’s important to note that even the Department of Revenue thought their figures were estimates of potential shortfalls and not representative of how things will play out in reality.

He added: “To say ‘oh my gosh, we have to do this or we’re going to lose revenue,’ that does not necessarily appear to be the case.”