As Massachusetts voters head to the polls on November 8^th, one of the more contentious ballot questions is Question One or the Fair Share Amendment.  In a nutshell, if passed the Massachusetts constitution would be amended such that any Massachusetts resident earning over a $1,000,000 annually pays an elevated tax rate of 9% – here’s the language.  In contrast, those earning less than $1,000,000 are taxed at the existing flat rate of 5%.  Basically, the question would establish two tax brackets, under and over a $1,000,000.

While it is not a business tax, it would have a negative effect on small business owners.  Most small business owners report business income as personal income; if the business profits exceed $1,000,000 they would be taxed at the higher rate. In addition, any capital gains from selling the business would also be taxed at the higher rate.  Folks that fall into the latter category are being called ‘one-time millionaires.’  Most small business owners don’t make $1,000,000 a year, thus not being subject to the new law; however when they sell their business many will exceed the $1,000,000 threshold.   These small business owners, often family businesses, don’t have pensions or 401Ks, the sale of their business represents their retirement – the sale of their business is their nest egg.

Let me paint a picture. Forty years, ago a young woman started a restaurant in downtown Lowell.  She invested all her savings, got support from friends and families, and a small business loan from a local bank.  Through all of Lowell’s ups and downs, she stuck around. She employed countless people, donated to local causes, and always kept her doors open.  Now she wants to sell the business and retire.  If she doesn’t do it soon, then she will get hit with a 4% tax increase if Question One passes – that’s her “fair share”.  Well, didn’t she pay her fair share all along with her commitment to the community?

The above dynamic holds true for any small business owner in Lowell – a law office, a dentist practice, an advertising agency, a lawn care company, an accounting practice, a contractor, etc.  Many small businesses sell for well over a $1,000,000. Just a few weeks back I was counseling a local advertising agency on a potential sale that was well over a $1,000,000 – it’s not a high bar for the sale of profitable small business.  It is not uncommon for a small business to sell for more than $1,000,000.

We need ‘one-time millionaires’ – they are entrepreneurs, small business owners, and importantly folks that have invested in our communities with blood, sweat, and tears.  More specifically, we need more ‘one-time millionaires’ in Lowell, and we certainly shouldn’t be punishing the ‘one-time millionaires’ that stayed in gateway cities like Lowell, helping keep the local economy afloat when so many businesses left during the down times.

Question One Tosses a Wet Blanket on Entrepreneurship

While I am concerned about the unfair impact on current small business owners, I am more concerned about new business startups, especially in key sectors.  In the twentieth century, Massachusetts policy makers learned a very painful lesson.  Factories can move.

Photo Courtesy Getty Images

In Lowell, we know this lesson too well.  We never thought a textile mill or manufacturing plant could leave.   Well, come to find out, it’s pretty easy to box up a piece of equipment and send it south or overseas.  In the twenty first century, policy makers are learning a new lesson. Do you know what moves easier than equipment and machinery? Capital.  Entrepreneurs and investors can move capital very quickly, especially in knowledge intensive industries.

I have worked around software and life science startups for decades.  Every entrepreneur worth their salt understands their tax burden upon starting, running, and exiting the business.   If Question One passes, entrepreneurs will think twice about starting a business in Massachusetts.  For the past thirteen years, I have worked on the board of M2D2 (Massachusetts Medical Device Development Center) UMass Lowell and UMass Medical’s life science incubator.  Our team helps life science start-ups get to market.   If I am a life sciences entrepreneur, and I can start a business in Lowell or Nashua, do you think the new tax will affect my decision?  We are not the only state with wet labs and smart people.

Taxachusetts: The Sequel

As Jim Stergios at the Pioneer Institute noted, if Question One passes it is likely to bring back the old Taxachusetts label for the Commonwealth.  This would be a shame.  Under Governor Baker’s leadership the Massachusetts economy has become a fine tuned engine.  We have focused on STEM, we have diversified our economy, and we have navigated the pandemic.  In 2022, the Massachusetts economy has a low unemployment rate, strong job growth, and positive business creation. To coin and old phrase, “If it aint broke, why fix it?”  Now, with record inflation, a recession on the horizon, and a weakening labor market, why would we tinker with an economy that is beginning to falter?  We need to leave well enough alone as we drift into economic uncertainty.

No doubt, Question One will pass in a landslide.  Why? It’s easy to demonize rich millionaires, even when you know them as your neighbors.  It’s unfortunate.  We aren’t talking about Jeff Bezos, we are talking about the restaurateur, the law office, the doctor, etc.  While it is fashionable to cast aspersions at the rich, we need rich people – people that took risks and bet on our communities.

We need to make it easier to start and run a business in places like Lowell, not tougher.  Question One doesn’t accomplish this goal.  It unfairly punishes entrepreneurs that demonstrated a commitment to our community, and will dissuade entrepreneurs from considering Massachusetts, especially gateway cities, when starting a business.  Question One proponents could have met in the middle, they could have carved out an exemption for one-time millionaires, e.g. small business owners selling their business.  Unfortunately, they decided against protecting mom and pop businesses.  More so, instead of a blanket tax increase on small businesses across the state, perhaps they could have carved out exception for gateway cities? Or made new business startups exempt in places like Lowell or Fall River?  Is that type of creative approach too much to ask from our policy makers?

Let me say something that too many politicians, policy makers, and professors never say – “I might be wrong”.   I can understand the motivations for increasing tax revenue and linking it to education.  Reasonable people can have reasonable disagreements on policy.  The good news in five years, around 2028, we will be able to see who was right.  We can look at tax receipts, business creation, and education investment.  My bet? Per pupil student expenditures adjusted for inflation won’t have increased, small business creation in certain sectors will be down, and tax receipts won’t be in line with Question One estimates.

In the past two years, small businesses across the state have struggled with COVID restrictions.  Now with Question One, we are putting another prospective penalty on small and family run businesses.  Remember, we aren’t lowering taxes as an incentive, we are increasing taxes on small businesses.  It’s a big distinction.  It never ceases to amaze me, when politicians talk about how we support small and medium businesses, that we need to stop supporting corporate behemoths like Amazon.  I agree.  If you love small business, you can’t support Question One – it’s that simple.  Question One will hurt small businesses and small business creation, especially in places like Lowell.