Why taxing the highly paid C-suite more doesn’t work

Massachusetts residents who left the state took a net $4.2 billion in adjusted gross income with them in 2023, a year that marked the first full year of a new surtax on millionaires, according to recently released Internal Revenue Service migration data.

The outflow was among the largest totals in the country and represented an 8% increase from the prior year, even as the pace of departures slowed. The net number of tax returns from outgoing residents fell 36% from 2022 to 2023, the data from February showed, suggesting fewer movers overall but more income attached to those moves.

As reported by Bloomberg, those federal figures arrive as state and local governments around the US are debating how aggressively to target high earners and wealthy households to raise revenue for public priorities, and as advisors field more questions about tax-driven mobility, domicile rules, and estate planning.

Massachusetts voters approved the surtax in 2022. The measure added a 4% levy on annual income over $1 million, with supporters arguing the revenue could bolster schools and transportation. Backers have pointed to more than $6 billion collected for state coffers since the surtax took effect, while opponents argue the policy risks pushing entrepreneurs and high earners to lower-tax jurisdictions.

“We are trying to make money on a smaller tax base. It’s going to be harder,” Jim Stergios, executive director of Pioneer Institute – a Boston-based think tank that opposes the tax – told Bloomberg.

The IRS migration data also suggests a shift in who is leaving. Taxpayers reporting $200,000 or more in income, the highest bracket tracked in the dataset, accounted for 70% of the net outflows in 2023. That share was higher than the prior year and more than double the level seen in 2019, before the pandemic-era surge in moving activity.

It’s worth noting that Massachusetts’ net outflows long predate the new surtax. The state has consistently lost residents and income to places such as Florida and New Hampshire, which does not tax wages or capital gains. Total lost income was higher in 2021 than in 2023, indicating that the headline outflow number is sensitive to broader economic conditions, remote-work flexibility, and housing patterns, not just top marginal tax rates.

For advisors, the Massachusetts figures provide a fresh case study in how quickly tax policy, and perceptions about tax policy, can become part of client conversations. Even where the number of movers falls, a relatively small number of high-income filers can materially influence a state’s income base and revenue volatility, particularly when a new surtax is designed to concentrate collections among top earners.

“A state’s ranking is not a permanent label – instead, it is meant to show states where they have done well and where they can still improve,” the think tank said.

Business-backed groups in Massachusetts, including Pioneer, are supporting ballot questions this year aimed at reversing some of the state’s recent direction. Proposals include lowering the state income tax rate to 4% from 5% and capping how much state revenue can increase in a given year. Gov. Maura Healey and other elected officials have panned the income tax cut proposal, saying it would create a multibillion-dollar hole in an already tight budget.

But those projections have been called into question, with government tax data suggesting the number of non-domiciled rich individuals quitting the UK were in line or below official forecasts.