A capital gains nightmare

To get a sense of why the state is in financial trouble, take a look at your investment portfolio. Most people are watching the value of their stocks and bonds plummet. There aren't many capital gains to report. If anything, there are losses.

The downturn in the market is a nightmare for state budget officials who have become addicted to growing capital gains tax revenues. Between 2002 and 2006, according to MassINC research, capital gains tax revenues accounted for 54 percent of the state's growth in tax revenues.

The consensus state revenue estimate of $21.4 billion for this fiscal year includes a projection that capital gains tax revenues will be off 13 percent from last year. That's a drop of close to $300 million, but in today's environment it seems wildly optimistic. It's very likely that a new consensus revenue estimate coming out next week will project a much steeper decline in capital gains tax revenues.

How far will capital gains tax revenues fall? "Nobody really had a specific answer," said House Speaker Sal DiMasi after a meeting with economists and budget watchdogs.

Capital gains tax revenues are highly volatile. In 2002, capital gains tax revenues fell by nearly $800 million in a single year. Combine a tax with that kind of volatility with other state taxes that are closely linked to economic growth and it's not hard to see why some officials are worried that the state budget could be as much as $2 billion out of balance.

Gov. Deval Patrick is preparing a menu of spending cutbacks, but he's racing against the clock. There's less than nine months left in the fiscal year, so the longer it takes to cut spending the more has to be cut to balance the budget by the end of the year.

DiMasi said all levels of government need to prepare themselves for what's coming. "Municipalities across Massachusetts should be concerned," DiMasi said in response to a question about state aid to cities and towns. "Many of us, including the governor, would like to see it protected at all costs. I still say they should be prepared."

There was no talk of imposing new taxes yesterday, but officials in and around government are exploring ways to raise revenues. Several officials have told CommonWealth that a number of revenue-raising measures have been suggested to the governor's office. So far, no decisions have been made.

Both DiMasi and House Ways and Means Chairman Robert DeLeo said it makes little sense to wipe out the state's $1.9 billion stabilization fund to cover this year's budget shortfall. Both said the state's rainy day fund will be needed in coming years. "This isn't anything that's going to go away overnight," DiMasi said.

Comments

[wellbasically]

Dear Bruce, don't you think it would be smarter for Patrick, DeMasi etc to figure out how to keep the economy and therefore the stock market from tanking before they dream up new revenue sources?

The economy is in the shitter because of inflation, because the dollar is not tied to anything, just controlled by a group of wise men in Washington. The banks are getting paid back in dollars worth half of what they lent out. The wise men make mistakes, just like everybody else. Right now our entire establishment, the Dems the Rs, Harvard, Wall Street, they're all out of answers. Everything they do hurts more.

Maybe they should stop agreeing with each other all the time and have a few fights. Wouldn't that be a better way to get to the right answer?