Small Biz Owners Fear Income Surtax Will Dent Nest Eggs

Boatyard Owner Calls Tax “Slap in the Face”

JAN. 20, 2022…..A handful of business owners from various sectors and from around Massachusetts came together Thursday to call attention to how the proposed surtax on income over $1 million would affect them and to push back against the notion of the proposal is something that would affect only the super-wealthy.

“The way this tax is portrayed in the media, it’s like all these rich people with boats and million-dollar houses and are just having gobs and gobs of money to throw around. But small businesses aren’t like that,” Ann Sullivan, who owns Metro Equipment Corporation in Braintree, said. “This is our nest egg. This is what I’m going to retire on and now I may have to postpone my retirement because of this. So for me, it’s really it’s affecting my day to day my life, my choices, and also the choices of my employees.”

Sullivan was one of six business owners convened by the Massachusetts Fiscal Alliance and the Massachusetts chapter of the National Federation of Independent Business, two organizations that have worked to rally opposition to a proposal that supporters call the millionaire’s tax.

The House and Senate jointly voted 159-41 last June to let voters decide on the 2022 statewide ballot whether to pass a constitutional amendment imposing a new 4 percent surtax on annual household income over $1 million.

If the surtax is approved by voters, the first $1 million of household income would still be taxed at the current 5 percent income tax rate and all household income above and beyond that first $1 million would be taxed at an effective rate of 9 percent.

The proposal would not just affect individuals. Sen. Patrick O’Connor estimated in 2019 that it could also apply to about 15,000 Massachusetts small businesses that file as pass-through entities for tax purposes, and it would also be charged on business owners who plan to sell their company to support their own retirement.

“The proposal to raise the income taxes is a slap in the face to small business. First in that it’s an extra tax on profits for a subchapter S corporation as most small businesses are and, second of all, if my family ever decides to sell this boatyard having put our life into it, we will be paying an extra 4 percent that will reduce our retirement income,” Toby Burr, owner of Burr Brothers Boats in Marion, said. “So I don’t think people realize the extent to which this tax is a penalty to small business.”

Rep. Jim O’Day, the House sponsor of the proposed Constitutional amendment, last June rejected opponents’ claims that the surtax would unduly harm small businesses in the Bay State by asserting that “businesses earning over a million dollars, in my estimation, are not small businesses.”

NFIB State Director Christopher Carlozzi said every business on the call Thursday morning would be categorized as a small business and said O’Day’s comment “shows a lack of understanding as to how small businesses operate in this state.”

“They’re not walking away with a million dollars in their pocket every year. It’s the way their business is organized for tax purposes and, as we’ve said, that’s money that’s reinvested into job creation and really reinvesting into Massachusetts,” he said. “So it’s very short-sighted to make a comment like that when I’m sure the representative has a lot of business owners in his district that would be very much impacted by this.”

Democrats on Beacon Hill have been pursuing the tax policy change for years and supporters say the surtax could generate significant annual revenue earmarked for education and transportation, without dipping into the pockets of most residents. But critics have long said it could prompt wealthy residents to move out of the Bay State and encourage employers to steer clear of Massachusetts.

Mass. Fiscal held a similar press conference a week ago, that one specifically to challenge the notion that the new surtax revenue would be spent only on transportation and education. And the latest estimate of the surtax’s potential showed that it may not generate quite as much money as previously thought.

A study released earlier this month from the Center for State Policy Analysis at Tufts University showed the amendment would generate about $1.3 billion in revenue for the state. It estimated that the proposed new surtax would be levied on about 21,000 state taxpayers, or less than 1 percent of all households in the state, who earn about 22 percent of all taxable income in Massachusetts.

The $700 million difference between the previous $2 billion estimate and the new Center for State Policy Analysis projection is partly explained by the expectation that some high-earning people will leave Massachusetts or use “tax avoidance” strategies to lower their tax burdens.

Still, the idea appears popular with voters across Massachusetts more than nine months before they will be asked to cast a vote on the proposal in November.

A new poll released by the MassINC Polling Group this month showed that 70 percent of registered voters support the effort to amend the Constitution to add the surtax on households that earn more than $1 million a year.