Income tax hike proposal in Mass. House will overturn previous tax relief by voter referendum.

WASHINGTON – In a slap in the face to taxpayers, leaders of the Massachusetts House of Representatives today indicated they are ready to freeze scheduled income tax reductions that voters overwhelmingly approved less than two years ago.

House Speaker Thomas M. Finneran (D-Boston) told the Boston Herald that a majority of House members support a measure to increase the rate to 5.6 percent. The goal is to raise more than $500 million in revenue. However, critics of the proposal claim that Massachusetts\’ budget problems are not the result of working families being under taxed, but rather, bad fiscal management through reliance on the unstable capital gains tax revenue. Capital gains revenue is estimated to decline by more than 70 percent since fiscal year 2000, resulting in a loss of $804 million to the state treasury. Clearly this is the source of the state\’s budget problems.

"The situation in Massachusetts proves that capital gains taxes are not only bad tax policy, but extremely poor budgetary policy as well," said taxpayer advocate Grover Norquist, who heads Americans for Tax Reform in Washington. "When the bubble bursts, all taxpayers have to pay."

This problem is not just new to Massachusetts. States all across America continually relied upon capital gains revenue throughout the booming 1990s to fund permanent programs. And as the markets headed south, states are stuck with paying the bill for new spending – but with no capital gains revenue to pay for it.

Revenue from capital gains taxes is highly volatile and unstable because it is closely associated with year-to-year fluctuations in the stock market. During the previous boom, stock prices increased significantly and capital gains revenue also increased. This revenue was often treated by state legislatures as a permanent increase in the tax base, and was used to fund permanent programs. But when the economy slowed and stock prices fell, capital gains revenue declined significantly. As a result, the slowdown of volatile capital gains revenue is exacerbating the revenue shortfall in Massachusetts and thus, places more pressure on lawmakers to increase taxes in other areas to pay for spending they previously committed themselves to. Capital gains tax revenue is also nearly impossible to forecast, as conventional techniques of revenue estimation are less applicable, because the acquisition of such income depends on decisions by the taxpayer, such as when to sell those shares of stock.

This reliance on capital gains revenue by the federal and state governments has significantly increased budget deficits. Just yesterday, the State of Maine announced state revenues may drop as much as $90 million by June 30th which was directly attributed to state capital gains revenue. In California, capital gains tax revenue declined by $10.5 billion in one year, which has led to Governor Gray Davis offering massive increases in taxes to offset the difference.