and the
Citizens Economic Research Foundation

Barbara's Column
August 1999 #2

Capital Gains Tax: Another Broken Promise
by Barbara Anderson

I wouldn't know a capital gain if I found one in my soup.

What little extra money I have is kept at my local bank where I can get it if I need it. I don't play the stock market for the same reason I don't gamble.

If I knew ten years ago what I know now, of course I'd buy stock in EMC as soon as it became available. But I'd have to know what I know now, because I am what investment experts call "risk-aversive" -- not so much afraid to lose, as preferring to just keep what I already earned.

And that's O.K. It takes all kinds to make an economy: savers, spenders, and investors.

But if I were the sort to take a risk with my money, I would expect to be rewarded, not penalized, for this risk-taking that creates jobs. This is why taxing capital gains can be a disincentive to investment and why capital gains tax cuts have historically led to booming economies. Also, I recognize that regular people like me sometimes have a capital gain once or twice in our lifetime, when we sell a small business as we retire, or cash in an account we set up for our kids' education or our parents' nursing home care.

So over the years I supported the business community's call for a capital gains tax cut. We were all surprised, though, when in December 1994, the Legislature actually passed a six-year phase-out of the six percent capital gains tax rate.

Most of our state's politicians like to demagogue the issue, acting as if capital gains taxes are paid only by the rich, who owe society something extra for creating its jobs. Why would Charlie Flaherty, then the ultraliberal Speaker of the Massachusetts House, support a phase-out of a tax that he usually argued to increase?

Well, at the time of this maneuver, Governor Weld had a 55 percent legislative pay raise bill on his desk which he was being urged by many of us not to sign.

Governor Weld had always wanted a capital gains tax cut. Suddenly, he had one! and quickly signed the 55 percent pay raise. The business community cheered. Investments held for at least six years would not be taxed at all. Almost made me want to take a little risk and invest in something!

But of course it was only a matter of time until the Legislature moved to increase the capital gains tax again. In 1998, the voters supported a constitutional amendment that gives legislators an automatic pay hike every two years as long as state median household income increases.

The connection would be clear to any economically-literate legislator: investors invest, make money, increase the median household income, he gets a pay raise. However, economic literacy has never been a widely held commodity on Beacon Hill. With their base pay including the 1994 raise now permanently part of the state constitution, legislators moved to break the deal they'd made on the capital gains tax. Both the House and Senate have voted to stop the agreed-upon phase-out. The Governor will veto this, and then they'll move to override.

Since they can easily break even more of the deal in the future, I guess I won't invest after all. I could hold an investment for several years thinking my tax rate will drop, and suddenly the Legislature could hike the rate to six percent again!

Investors who have held their capital until the rate was fully phased-out feel betrayed. They've just learned what we wage earners already knew: you can't trust the Legislature to keep its part of a bargain. That's why Governor Cellucci and we just filed an initiative petition to let the voters rollback the 1989 "temporary" income tax hike themselves.

Opponents of our petition call it "risky," even though it's carefully phased in after years of giant state surpluses. They are piggybacking on the carefully-crafted Washington Democrat line that calls any real tax cut is a "risky tax cut scheme." But all of us should realize that the real risk is in trusting the government to ever keep its word.

Barbara Anderson is executive director of Citizens for Limited Taxation. Her syndicated columns appear in the Salem Evening News, the Lowell Sun, the Tinytown Gazette and MediaNews Group newspapers around the state.