Within the 2022 midterm elections, residents of California, like these of Massachusetts, voted to place Democrats in commanding management of their state authorities. But these two left-leaning electorates rendered opposing verdicts on comparable tax measures in search of to boost state earnings tax charges on higher earnings households.

With 57% voting No, California voters resoundingly defeated Proposition 30, a poll measure that may’ve added a brand new, 15.05% high marginal state earnings tax charge making use of to earnings above $2 million. At 13.3%, California already levies the very best high private state earnings tax charge within the nation.

With the defeat of Proposition 30, higher earnings filers and hundreds of small enterprise homeowners averted being hit with a 1.75 proportion level, 13% enhance of their high marginal state earnings tax charge. In response to IRS information, in 2019, the newest yr for which information is offered, greater than 86,000 pass-through enterprise homeowners filed underneath the person earnings tax system in California and have earnings above $1 million. What number of have earnings above $2 million is just not delineated by the IRS information, however it’s probably ten of hundreds of small enterprise homeowners who would’ve seen their job creating and sustaining capability diminished had Proposition 30 handed.

The ride-sharing firm Lyft
LYFT
was the first monetary backer of Proposition 30, which directed the extra funding to the buildout of electrical car infrastructure. Had Proposition 30 been enacted, the brand new 15.05% earnings tax charge would’ve raised a further $3 billion to $4.5 billion yearly, in keeping with projections from the Legislative Analyst’s Workplace.

Governor Gavin Newsom (D), together with the California Lecturers Affiliation, urged Californians to reject Proposition 30, partly, as a result of it could make income collections much less predictable. “California’s tax revenues are famously unstable, and this measure would make our state’s funds much more unstable,” Newsom mentioned of the proposed earnings tax hike.

“Proposition 30 is a particular curiosity carve-out — a cynical scheme devised by a single company to funnel state earnings tax income to their firm,” Newsom mentioned. “Californians ought to know that simply this yr our state dedicated $10 billion for electrical autos and their infrastructure.”

“The election outcomes are an unlucky setback for the local weather motion,” a Lyft spokesman mentioned the day after the election. “Tens of millions have been spent by the opposition to confuse and misguide voters, nevertheless we’re undaunted … we stay dedicated to reaching our collective local weather targets.”

Whereas Golden State voters rejected an earnings tax hike on excessive earners, in Massachusetts one other “millionaires tax” proposal, Query One, handed with almost 52% help. Query One is a constitutional modification that may transfer Massachusetts from a flat to progressive earnings tax construction. Massachusetts presently has a 5% flat state earnings tax charge and passage of Query One will create a brand new 9% charge on earnings above $1 million {dollars}.

Query One is projected to boost a further $1.5 billion yearly for state coffers. Whereas the progressive tax hike rejected by Californians would’ve been used to fund EV infrastructure, the earnings tax enhance authorized in Massachusetts will use the extra funds to spice up training and transportation spending.

Whereas the state academics union was a serious opponent of the defeated California earnings tax enhance, they have been the highest proponent and funder of the Massachusetts earnings tax hike. The California Lecturers Affiliation spent $5 million to defeat Proposition 30. The Massachusetts Lecturers Affiliation, in the meantime, spent $15.5 million in help of Query One. The American Federation for Lecturers additionally kicked in $6.7 million to assist go the earnings tax hike.

Whereas this tax hike was offered to Bay State voters as a strategy to make the wealthy pay extra, small companies will even be hit with this tax enhance. In response to IRS information, greater than 19,000 homeowners of sole proprietorships, LLCs, partnerships & S companies that filed underneath the non-public earnings tax system in Massachusetts in 2019 would’ve be hit by the 44% earnings tax charge hike imposed by Query One had it been in impact on the time.

In Transferring From Flat To Progressive Earnings Tax, Massachusetts Turns into A Nationwide Outlier

Query One marks the sixth time previously 50 years {that a} measure in search of to maneuver Massachusetts to a progressive earnings tax has been placed on the poll. The earlier efforts occurred in 1962, 1968, 1972, 1976, and 1994. In 2022, Query One grew to become the primary progressive earnings tax proposal to obtain voter approval.

By transferring from a flat to a progressive earnings tax construction, Massachusetts is bucking a nationwide development, as extra states have been transferring in the other way, going from a progressive to a flat earnings tax. In September, Idaho grew to become the fifth state previously two years the place lawmakers enacted laws transferring from a progressive to a flat state earnings tax construction. Different states the place lawmakers have handed laws to maneuver from a progressive to flat earnings tax over the previous two years embody Georgia, Mississippi, Iowa, and Arizona.

North Dakota Governor Doug Burgum (R) has a proposal to maneuver his state to a flat tax. Till passage of Query One, enactment of Governor Burgum’s plan would’ve made North Dakota state quantity 25 with a flat state earnings tax charge. Approval of Query One, nevertheless, will cut back the variety of flat tax states by one, bringing it right down to 23 presently. Which means enactment of the flat tax proposal pending in North Dakota would get the full variety of flat tax states again to 24.

One of many now 23 states that has a flat tax, Colorado, had an earnings tax lower on the poll within the 2022 midterm elections. Proposition 121, which was authorized with 65% of the vote, will lower Colorado’s flat earnings tax charge from 4.55% to 4.40%. Passage of Proposition 121 marks the second discount within the state’s flat earnings tax charge to be authorized by Colorado voters previously two years.

There are a variety of potential take-aways from the outcomes of those 2022 poll measures. It’s clear that it’s very useful for progressive tax hike initiatives to have the academics unions on board, at the very least in states as blue as California and Massachusetts. One other potential take-away for a lot of shall be that, whereas the 2022 midterm elections went a lot better for Democrats than was anticipated entering into, the outcomes don’t seem to symbolize an endorsement of progressive insurance policies, even in Democratic strongholds.