The Rise and Fall of the Millionaire Tax in Massachusetts by David Nagle and Joseph Donovan (July 11, 2018, 2:00 PM EDT)

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Inc. | 111 West 19th Street, 5th Floor | New York, NY 10011 | www.law360.com Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | [email protected] The Rise And Fall Of The Millionaire Tax In Massachusetts By David Nagle and Joseph Donovan (July 11, 2018, 2:00 PM EDT) In a decision released June 20, 2018, the Massachusetts Supreme Judicial Court ended a three-year effort to amend the Massachusetts Constitution and impose an additional tax on individuals with income exceeding $1 million.[1] The court’s opinion addresses the procedure for amending the constitution via initiative petition, as opposed to the merits of a graduated income tax.[2] In analyzing the “related subjects” requirement for such initiatives, and concluding that this initiative failed to contain subjects “which are related or which are mutually dependent,”[3] the court’s opinion strikes a balance between direct and representative democracy, while providing a roadmap for future initiatives and highlighting their importance in lawmaking. David Nagle Background The Massachusetts Constitution has authorized the legislature to levy a personal income tax since 1915 but requires that rates be uniform “upon incomes derived from the same class of property.”[4] “Whatever may be the merits of the system commonly described as the graduated income tax, it is prohibited by article 44” of the amendments to the Massachusetts Constitution.[5] Massachusetts currently taxes ordinary income and long-term capital gains at 5.1 percent, and short-term gains and gains from the sale or exchange of collectibles at 12 percent. While these rates are flat, “the effect of the tax is progressive” Joe Donovan because other features offset the regressive effect of local property and state sales taxes, including substantial personal income tax exemptions, deductions and credits for low-income taxpayers.[6] Proponents seeking greater progressivity have proposed a series of constitutional amendments to authorize graduated income tax rates, but voters rejected such proposals in 1962, 1968, 1972, 1976 and 1994.[7] Initiative Petition 15-17 In 2015, a coalition of community organizations, religious groups and labor unions adopted a new playbook. Instead of authorizing the legislature to set rates and brackets, their initiative petition would have imposed within the Constitution itself an additional 4 percent tax on personal income in excess of $1 million.[8] Massachusetts’ current 5.1 percent rate on most income would have increased by approximately 80 percent to 9.1 percent, and the 12 percent rate on short-term gains would have increased by a third to 16 percent. The Massachusetts Department of Revenue estimated that the additional tax would raise approximately $1.9 billion per year.[9] The DOR cautioned that the number of high-income earners and their income could “fluctuate considerably from year to year” and that such earners might “respond to the additional tax by changing decisions on migration, consumption, investment, business location, etc.”[10] Proponents within and outside the legislature nevertheless supported the initiative, regarding it as an expedient means to raise approximately $2 billion per year, which represents approximately 5 percent of the commonwealth’s annual $40 billion budget. Some supporters characterized the surtax as “money for nothing,” at least for most taxpayers. The DOR estimated that the additional tax — variously referred to as the Fair Share Amendment, the Millionaire’s Tax or Prop 80 — would affect approximately 19,500 personal income returns, or 0.5 percent of all Massachusetts filers.[11] Harris Gruman, executive director of the Service Employees International Union, explained that “[w]e are strategic about these things. ... When you get to a million you get to this inflection point that drives up popular support. And that is why we went for incomes over $1 million. That’s still kind of a magic number to people. That’s Thurston Howell III. They’re like, ‘Yes. They should pay more.’”[12] Some legislative leaders were comparably candid. At the constitutional convention in June 2017, Rep. Jay Kaufman argued for the initiative partly on the basis that “99.5 percent of us in this commonwealth will not be impacted by this in the least save for the better services that we will get in exchange for the revenue that comes. So this is a tax that will only apply to one half of one percent of the tax filers in the commonwealth, those with the highest income.”[13] The drafters sweetened the initiative petition by earmarking the additional revenue for education and transportation spending, which in hindsight was too much of a good thing. The initiative required revenues to be expended, subject to appropriation, “for quality public education and affordable public colleges and universities and for the repair and maintenance of roads, bridges and public transportation.”[14] The court’s opinion notes that in 2015, then Senate President Stanley Rosenberg observed that past “constitutional amendments have been very differently constructed,” whereas this one “will stand a better chance of being approved” because “it is focused specifically on money for education and transportation,” and because it affects only “people who make more than $1 million in taxable income.”[15] The legislative oddmakers would probably have been correct, if the court had approved the initiative petition. By the end of May, polls showed strong support for the initiative, which was attractively titled an “Initiative Petition for An Amendment to the Constitution of the Commonwealth to Provide Resources for Education and Transportation through an additional tax on Incomes in excess of One Million Dollars.”[16] Procedural History The Massachusetts attorney general certified the initiative petition in September 2015, after which proponents needed to gather approximately 65,000 additional signatures. The initiative petition then needed at least 25 percent of the votes of the Massachusetts House of Representatives and Senate jointly assembled in constitutional convention in two successive biennial legislative sessions. The Legislature obliged, approving the amendment by a vote of 135-57 in May 2016 and by a vote of 134-55 in June 2017. If the court had concluded that certification was proper, then the initiative petition would have appeared on the ballot this coming November and needed a simple majority of the votes cast to become effective, assuming approval by at least 30 percent of all ballots cast. Opponents initiated their legal challenge last fall. Leaders of the Massachusetts High Technology Council, Associated Industries of Massachusetts, the Massachusetts Taxpayers Foundation, the Massachusetts Competitive Partnership and the National Federation of Independent Business raised three arguments against the initiative’s certification. First, opponents argued that the initiative petition violated the constitutional requirement that ballot initiatives contain “only subjects ... which are related or which are mutually dependent.”[17] Opponents argued that the initiative petition combined “three very different subject matters: whether to impose a graduated income tax, and whether to give preferential treatment in state spending to two unrelated subject matters — education and transportation.”[18] Second, opponents argued that earmarking the tax revenue for education and transportation would violate a prohibition against making a “specific appropriation of money from the treasury of the commonwealth.”[19] Finally, opponents argued that specifying a tax and tax rate within the constitution would impair the legislature’s general supervision and control over taxing and spending in a manner inconsistent with the constitution.[20] The Court’s Opinion In an opinion authored by Justice Frank Gaziano, the court concluded that “the initiative petition should not have been certified ... because ... the petition does not contain only subjects ‘which are related or which are mutually dependent.’”[21] Under this “related subjects” or “relatedness” requirement, the similarities among an initiative’s provisions must “dominate what each segment provides separately so that the petition is sufficiently coherent to be voted on ‘yes’ or ‘no’ by the voters.”[22] An initiative’s subjects, the court explained, “must embody one purpose, and ‘must express an operational relatedness among its substantive parts that would permit a reasonable voter to affirm or reject the entire petition as a unified statement of public policy.”[23] The court explained that the related subjects requirement was intended to prevent voter confusion and “logrolling,” which is the “practice of including several propositions in one ... proposed constitutional amendment so that the ... voters will pass all of them, even though these propositions might not have passed if they had been submitted separately.”[24] While there is “no single ‘bright-line’ test for determining whether an initiative meets the related subjects requirement,”[25] “‘the general subject of an initiative petition cannot be so broad as to render the “related subjects”’ limitation meaningless.”[26] Significantly, in analyzing the requirement that the petition contain only subjects “which are related or which are mutually dependent,” the court reasoned that the phrase “or which are mutually dependent” does not “impose a separate requirement that may be satisfied even if the subjects of a petition are not related.”[27] In other words, the word “or” essentially means

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