and the
Citizens Economic Research Foundation

June 10, 2005

CLT supports Governor Romney’s solution
to the 2002 Legislature’s capital gains tax fiasco

This is not meant to criticize the 2005 Legislature, which we hope will clearly see the mistake its predecessor made in 2002. But as fiscal insanities go, this one was a doozy.

As part of the biggest tax increase in state history, in June 2002 the Legislature not only froze the income tax rollback, but increased the capital gains tax rate.

It was apparently obvious to everyone that the state couldn’t tax wage-earners’ paychecks from January through April at one income tax rate, and wage-earners’ paychecks from May through December at a higher rate.

It was clear to CLT from the beginning that the state couldn’t legally change the capital gains tax rate in the middle of the year, either. Eventually the state Supreme Judicial Court made that clear to everyone and wants the state to choose either Jan. 1, 2002, or Jan. 1, 2003 as the beginning date of the higher tax, so that all taxpayers are charged the same rate on their capital gains for 2002.

If the state chooses Jan. 1, 2002: it can keep the ill-gotten revenues from the illegal 2002 tax hike, as it applied from May through December, then would have to retroactively increase the tax on people who realized their capital gains from January through April.

An example: Joseph Svelnis sold his bakery building in April 2002 as he prepared for retirement. He had every reason to think, as he made his decision as to when to sell, that his capital gains tax rate, under the law in April 2002, would be 0% since he had held his bakery longer than six years. So he sold and got on with his retirement.

In June the Legislature changed the capital gains tax rate to 5.3%. It is fair to have a discussion as to why capital gains would be taxed at zero when wage income is taxed at 5.3%. What is not fair is, three years later after the case has made its way through the court, to go back and tax Mr. Svelnis retroactively. And incredibly, there would be penalties attached for the tax he hadn’t paid that hadn’t existed at the time he hadn’t paid it!

Not only is this unfair to Mr. Svelnis, it’s an insane message to send to investors anywhere in the world, who would think that the Commonwealth of Massachusetts has taken total leave of its senses. Who would want to invest here, own business property here, if the capital gains tax rate changes impulsively after entrepreneurial decisions are made?

CLT is concerned not only for Mr. Svelnis, the baker – and the butchers and candlestick makers across the Commonwealth who could also be hurt – but for the state economy and our image as a place to do business. We applaud Governor Romney’s decision to file legislation to change the effective date of the capital gains tax rate to January 1, 2003.

Seeing the new revenue numbers, it is clear that Massachusetts can afford to return the taxes paid by May-December capital gains taxpayers in 2002, and then roll back the state income tax rate to the promised 5 percent. We are grateful to Gov. Romney’s support for both.

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