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
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
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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