Massachusetts tax competitiveness index improves but residents still leaving state: ‘Overly burdensome’

Massachusetts’ tax competitiveness index has slightly improved over the past year, bumping up to the tenth worst in the nation from the fifth worst, but watchdogs say it’s still far too low and causing people to leave the state.

The Tax Foundation, a national watchdog group, increased the Bay State’s taxation standing from 46th last year to 41st this year in its 2025 State Tax Competitiveness Index, a ranking that compares state tax systems.

Rebranded from the State Business Tax Climate Index, this year’s report, released Thursday, ranked individual income taxes, corporate taxes, sales, use, and excise taxes, property and wealth taxes, and unemployment insurance taxes.

“Overly burdensome individual income taxes, property taxes, and UI taxes” have left Massachusetts remaining in the bottom 10 in the entire nation for competitiveness, the report’s authors wrote.

Like last year, authors slammed Massachusetts voters for approving the Fair Share Amendment, or the so-called “millionaire’s tax,” in the November 2022 election — incomes over $1 million are taxed an extra 4%.

The amendment “(dismantled) the state’s formerly competitive flat income tax … making Massachusetts less attractive for productive households and businesses,” the report states.

Before the millionaire’s tax went into effect, Massachusetts had already dealt with taxpayers fleeing at a high rate, at the cost of billions in “adjusted gross income,” IRS data has shown over the years.

Massachusetts had the fifth-worst income loss due to domestic migration in 2022, at a cost of roughly $3.9 billion, according to data the Internal Revenue Service reported in July.

Chris R. Anderson, president of the Massachusetts High Technology Council, which advocates for a competitive business climate, highlighted how a survey conducted in September revealed that 80% of residents agree state taxes are too high.

“Oppressive taxes aren’t just a business community concern,” Anderson said in a statement on Thursday. “This is a quality-of-life issue for everyone in the Commonwealth. … The long-term consequences aren’t hypothetical: If we don’t turn the tide, we will continue to lose talented residents, families, and entrepreneurs to states with more competitive taxes.”

Massachusetts’ overall tax system is also being hampered because of the lack of first-year expensing, which the Tax Foundation says is “discouraging in-state investment.”

The main drivers behind the crumbling taxation are the nation’s tenth-worst income tax ranking of 4.54%, the fifth-worst property tax ranking of 3.93%, and the third-worst unemployment insurance ranking of 3.97%, Tax Foundation figures indicate.

New Hampshire is the only New England state to have ranked in the top 10 for best indexes, at 6, which the Tax Foundation credited to lawmakers there “only imposing a narrow tax on interest and dividend income.”

Paul Diego Craney, spokesman for watchdog Massachusetts Fiscal Alliance, pointed out how he believes the “poor grades are direct results of poor decisions being made at the State House” under Gov. Maura Healey.

“If Massachusetts wants the playbook for how to be competitive and affordable, look no further than New Hampshire and Florida,” Craney stated. “These states don’t have the taxes Massachusetts applies to its taxpayers. The only way Massachusetts will find its way out of this economic mess is by eliminating some of these taxes.”

Florida came in at the fourth-best index in the country, which the Tax Foundation report said is due to its lack of individual income tax. The study also found an “absence of a major tax is a common factor among many of the top 10 states.”

Wyoming and South Dakota ranked first and second best respectively, with neither state imposing a corporate or individual income tax.

Craney said Massachusetts’ sales tax rate of 6.25% is the “only anchor keeping the state from sliding any worse.” The rate is the 20th best in the nation.

Healey has tried to uplift the devastating tax system since she took office in January 2023. A $1 billion-a-year tax relief bill that went into effect as the calendar flipped to 2024.

The package cut the short-term capital gains tax from 12% to 8.5%, a business-backed move that riled progressives who argued it gave a break to the wealthy. The compromise cost the state $561 million in fiscal year 2023 and $1 billion a year starting in fiscal year 2027, according to the bill’s own projections.

It also included boosts to the rental deduction cap, a tax credit for a dependent child, disabled adult, or senior, and the statewide cap for a housing production program. The bill excluded estates valued up to $2 million from the estate tax by allowing for a uniform credit of $99,600.

But state leaders need to do more to lower the cost of living and conducting business for small employers, argued Jon Hurst, president of the Retailers Association of Massachusetts.

“High property taxes increase our housing costs,” Hurst said in a statement to the Herald, “and high sales and income taxes hurt the disposable incomes for our working families, leading to lower sales on Main Street.

“Excessive regulations increase operating and employment costs for small businesses,” he added, “particularly on health insurance premiums and payroll taxes.”