The Boston Globe
Sunday, July 7, 2002
Capital gains double-cross
By Jeff Jacoby
Deadlines were made for mere mortals like you and me, not
for the demigods of the Massachusetts Legislature. You and I have to make our mortgage payment when it's due, file
our tax returns by April 15, and get to the polls before 8 p.m. on election day if we want to
vote.
But things are different on Beacon Hill. In the Massachusetts House and Senate, deadlines
are puny things, easily brushed aside or trodden underfoot. So it is no surprise
that, once again, the Legislature has failed to produce a state budget in time for the new fiscal year.
Apart from passing an annual spending plan before July 1,
lawmakers in Massachusetts are not required to do very much. They are paid a substantial salary
-- $50,000 plus as much as $25,000 more in per diems, office accounts, and "leadership"
pay -- for what amounts to little more than showing up at the State House and sometimes casting a vote. Most state
legislators don't draft important bills, shape public policy, undertake research, or think for
themselves. They don't even have to campaign for reelection, since the Republican Party
courteously allows most Democrats to run for office unopposed.
There is really just that one responsibility: enacting a
state budget by July 1. But year in, year out, that proves to be more than the General Court can manage. Last year, it
finally got around to finalizing the budget on Thanksgiving Eve. Two years before that, the story was
much the same.
It's bad enough that the Legislature is too incompetent to
comply with a clear statutory timetable. But now it is preparing to do something even more obnoxious: It wants to
punish citizens who do. How? By not only raising a tax that hundreds of thousands of
Massachusetts residents pay, but by making it retroactive to Jan. 1, 2002. The higher tax
rate is lousy public policy. The retroactivity is an outrage.
Some background: Since 1994, Massachusetts has been taxing
long-term capital gains - the profit earned from selling assets held for longer than a year
-- on a sliding scale. Taxpayers who sell property they have owned for more than one year pay 5
percent of their profit to the state. Those who sell after two years pay 4 percent. And so on down to a rate of zero
for assets that have been held for six or more years.
The economic rationale for taxing capital gains in this way
is straightforward: It encourages taxpayers to invest for the long haul instead of for short-term speculation. A disappearing
tax on capital gains is especially beneficial in a state like Massachusetts, where start-up
technology companies often cannot pay high salaries and are apt to reward their most
valuable employees with company stock instead.
The list of those who benefit when very long-term capital
gains are free of state tax is long, from the small business owner who sells the company she spent years building up to the
parents socking away a few dollars every week into a mutual fund for Junior's college
education. The popular myth is that only fat cats have to worry about capital gains taxes, but
the reality is very different. According to the Internal Revenue Service, 40 percent of
Massachusetts taxpayers who reported capital gains (or losses) in 2000 had an income of
$50,000 or less. It isn't just Easy Street that pays capital gains taxes;
Main Street pays them, too.
Taking the law at its word, thousands of taxpayers held onto
an asset until this year in order to reap the benefit of selling it tax-free. But the Legislature is now poised to hike
the tax rate on all capital gains to 5.3 percent regardless of how long the asset was held. Worse, it wants
to make the increase retroactive to the start of this year. In other words,
it plans to penalize taxpayers who arranged their financial affairs to comply with the timetable established by law.
Instead of paying no tax (or a tax of 1 percent, 2 percent, etc.), they will be slammed with a
tax of 5.3 percent -- a tax they could not have anticipated because it didn't exist at the
time of their sale.
This is rotten tax policy. And like the other tax hikes in
the overdue budget, not only rotten but unnecessary: Taxes are going up only because Beacon Hill refuses to bring spending
down. (The new budget will be hundreds of millions of dollars higher than the last one.) But
there is an added detail that makes this tax even more offensive.
In 1994, the House and Senate leadership struck a deal with
then-Governor William Weld: They would pass the capital gains tax phaseout he wanted if he would sign a bill hiking
legislators' pay by 55 percent. When the public found out, it was appalled, but the deal held:
Lawmakers pocketed their raise, and taxpayers got a break. If the Legislature now
intends to take back the tax cut, it goes without saying that it must give up the pay raise.
Will the members do the right thing? We won't know the
answer until the final budget appears. That could happen any time between now and
-- oh, Thanksgiving.
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