The Mass Exodus from Massachusetts
Recently, the Pioneer Institute published a study about the taxpayer exodus from Massachusetts based on 2021 IRS tax filer data. We’ve heard some press coverage about the 110,000 people who have left the state. But digging into the study’s numbers in greater detail is cause for alarm.
In 2012, $900 million of adjusted gross income dollars left the state. In 2021, that number was $4.3 billion, amounting to almost a fivefold increase. Massachusetts is now the fourth largest state in terms of outflow of tax dollars, only behind California, New York, and Illinois.
Shifts in federal tax policy, like limiting tax deductions for SALT taxes, have presented an opportunity for other states differentiating them from “blue” or heavily taxed states. These states seized this opportunity to attract growth, business, and many of the high-income earners choosing to leave Massachusetts. Forty three states have enacted some type of tax relief. Massachusetts is slow to make any moves in this direction, despite a consistent drum beat of encouragement from new Governor Maura Healey.
The top one percent of taxpayers pay 23 percent of the overall state tax burden. These are earners making more than $200,000 annually. Understandably, the top age bracket of individuals leaving Massachusetts are aged 55-64. Yet, the second highest outflux are earners in the 26-34 category. Thus, we are losing our younger and most vibrant workers.
Estate taxes matter to people. Thirty three states have no state estate tax. However, Massachusetts has a graduated estate tax (.8 percent and a maximum of 16 percent) with an exemption of $1 million. The federal estate tax exemption is $13 million.
Additionally with the added 4 percent “Millionaire’s Tax” making the state burden 9 percent on any income over $1 million, it is undeniable that people are making geographic changes. It’s not clear yet whether property sellers realizing large gains on assets they’ve held for decades have yet to understand this added burden.
Under post-Covid conditions, the study indicates that 58 percent of Boston area workers employment includes a significant work-from-home component. We all understand the trickle-down impacts of this — our tenants prefer us not to interrupt them for maintenance calls in their apartments when they are working from home — and we see the soft vacancy rates in the downtown office market. Yet, this also gives workers greater flexibility in terms of where they can live to do their jobs.
Quite simply, there are other states that don’t impose these taxes.
The reason for this outflow is consistently the extraordinary cost of housing in Massachusetts. Yet, we’re watching the City of Boston push numerous anti-housing production policies, including the extensive discussion of rent control, surtaxes on property sales over $2 million, and policies like TOPA (Tenant Opportunity to Purchase Act). This is on top of additional affordable components for developers, coupled with an immensely bureaucratic permitting process at the BPDA and NIMBYism (Not in My Back Yard), as well as an uncertain economic climate. It is, therefore, no wonder that new production has essentially ground to a halt.
Pleas and warnings from the real estate industry fall on deaf ears at Boston’s city hall. SPOA has found state legislators to be more receptive and concerned about what is becoming an undeniably hostile environment for business owners, yet slow to act. As a result, the daily discussion amongst small business owners SPOA talks to is their exit strategy. Apparently, Massachusetts CPAs are in agreement as they claim 80 percent of their high net worth clients are planning on fleeing the state.
It isn’t possible to count the billions of dollars of development that will bypass Boston given these proposed policies. Once institutional investors and family offices no longer develop in Boston, what does that mean for the state in the longer term? It becomes like turning around an ocean liner.
Maybe Boston’s housing policy initiatives would have fared better in the pre-Covid economy, but coupled with rising interest rates and an approximately 45 percent increase in construction costs, it’s just not possible in the current economic climate.
Elected officials in Massachusetts must consider how they can legislate for a more business- friendly climate. But this seems slow to emerge with extensive progressive political pressure.
Where do we go from here? It remains unclear and many are choosing to deny the data and the numbers — massive drain of tax dollars leaving the state and non-existent housing production levels, but that seems a winnable strategy for only so long.
The numbers are the numbers — and the data from 2022 is likely to look a whole lot worse for Massachusetts.
by Allison Drescher
