Capital gains freefall
More spending cuts and new taxes will probably be necessary as state officials awaken to the potential for a sharp downturn in capital gains tax revenues this fiscal year and next year.
At a hearing today on Beacon Hill, Revenue Department Commissioner Navjeet Bal said her agency now believes tax revenues for the fiscal year ending June 30 will total somewhere between $19.55 billion and $19.65 billion, or $648 millon to $749 million below a $20.3 billion estimate made just two months ago. Using an alternative economic model for forecasting capital gains tax revenues, Bal said revenues could fall an additional $492 million.
State officials have already announced plans to close a $1.4 billion budget gap for this fiscal year with a combination of spending cuts, employee layoffs, and money from the state's "rainy day" fund. The new revenue estimates mean that more cuts or new revenues will be needed to bring the state's books into balance.
"The wide range of estimates we have given reflects the extreme uncertainty that characterizes the current economic and forecasting environment, particularly, but not exclusively, as it relates to capital gains," Bal said.
The original consensus revenue estimate for this year projected a 30 percent decline in capital gains tax revenues, but now the Revenue Departrment is forecasting a 49 percent drop, with an outside chance it could go as high as 59 percent.
Capital gains taxes are paid when investors report profits from dividends and stock sales. In the current economic environment, most investors are selling their investments at losses, not gains.
Economists who testified at yesterday's hearing said they believe Massachusetts went into recession in July or August, seven to eight months later than the country as a whole. The problem for state officials is that Massachusetts is more reliant than most states on the tax revenues most likely to be hard hit by the economic downturn.According to a recent report by MassINC, nearly all of the state's tax revenue growth between 2002 and 2006 came from just two taxes — capital gains and business taxes. The report said Massachusetts ranks third in the nation in terms of the relative importance of capital gains for the state budget.
Both capital gain and business tax collections are highly volatile and subject to sharp swings downward when the economy falters. In the last two economic downturns in Massachusetts, capital gains tax revenues fell 75 percent and 66 percent.