Plenty of Massachusetts residents have been hurting because of the stock market meltdown (ask everyone in your office to check their 401(k)s at the same time, and the cries of anguish will be heard on the next block), but the state itself may be in the biggest trouble.
The latest MassINC policy brief, “Capital Gains: Avoiding Harm to the State Budget,” details how much state government relies on the capital gains tax (which applies to profits realized by selling stocks, as well as real estate and other capital assets):
Despite the known volatility of capital gains, the Commonwealth’s dependence on them has grown markedly since the beginning of the decade. At the same time, however, our preparedness for managing that volatility has declined. In 1999, Massachusetts was already one of the states most dependent on capital gains revenues, ranking 7th in the nation in the relative importance of capital gains for its state budget. By 2006, the importance of capital gains had grown. Massachusetts is now third most at risk among the 50 states if capital gains income declines. [Only Oregon and Connecticut are higher. – Ed.]
The state has been increasingly relying on capital gains income to fund ongoing spending, including new expenditures that have added considerably to the budget. From 2002 to 2006, capital gains were responsible for $1.2 billion or 54% of the state’s tax growth revenues. This year, roughly $1.5 billion of the budget was funded with expected capital gains receipts, much of which are now in jeopardy.
Today’s Boston Globe has an editorial (“The state’s binge-purge diet“) that calls for “sensible solutions to even out the jagged revenue” from the capital gains tax, but the newspaper opposes a broadening of the general sales tax (“the exemptions for food and nonluxury clothing items are what keeps the regressive sales tax from being even more of a burden on the poor”).