FY2010 House 1 Budget Recommendation:
Policy Brief
Deval L. Patrick, Governor
Timothy P. Murray, Lt. Governor
State governments and budgets are always subject to the ups and downs of the economic cycle. Massachusetts is no exception. The current economic crisis demonstrates that the volatility of the Commonwealth’s budget is exacerbated by its over-reliance on capital gains tax revenues to support spending. The fiscal year 2010 budget includes a proposal to reform the way the Commonwealth budgets against capital gains tax revenues to promote fiscally sound budgeting practices and curb the problem of recurring structural deficits.
Capital gains are the state’s
most volatile tax revenue source. Based on tax year 2000 rates, these tax
revenues declined $829 million – or 71 percent – from 2000 to 2002. They are
expected to decline by about $1.3 billion from fiscal year 2008 to fiscal year
2010. In between these fiscal crises, capital gains revenues grew
substantially. Capital gains tax revenues increased each year between fiscal
year 2003 and 2008. After adjusting for changes in the capital gains tax rate,
capital gains tax revenues in fiscal year 2008 were almost $1.4 billion higher
than in fiscal year 2003 and accounted for about 25 percent of tax revenue
growth over that time. While some of these gains were used to replenish the
balance in the state’s Stabilization Fund, there was not a formal policy guiding
the use of these additional revenues. In fact, during years of extremely strong
growth in capital gains revenues, the state used most of those revenue to make
spending commitments – resulting in structural budget deficits when capital
gains revenues moderate and requiring extreme cuts when they plummet.
To address this problem, the fiscal year 2010 budget establishes a new mechanism for budgeting for capital gains revenues. As one element of the yearly consensus revenue process, the Governor and Legislature would agree on a maximum amount of capital gains tax revenues that would be included in the overall consensus revenue estimate. This amount would be based not simply on short-term projections but also longer-term trends in capital gains – and how best to account for them in yearly projections. On a quarterly basis, the Department of Revenue would estimate year-to-date capital gains tax revenues.
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If (i) these quarterly estimates exceed the related year-to-date maximum capital gains tax benchmark, as determined by the consensus tax revenue estimate benchmark, and (ii) total year-to-date tax revenues exceed the related consensus tax revenue estimate, the excess capital gains revenue will be transferred to the new Capital Gains Revenue Holding Fund. If any quarterly estimate of year-to-date capital gains revenue is less than the related year-to-date capital gains consensus estimate, the Comptroller is authorized to transfer any amounts on deposit in the CGRH Fund to the General Fund to cover the shortfall. Any amount on deposit in the CGRH Fund following the last certification of quarterly capital gains tax revenues for the related fiscal year by the Department of Revenue will be transferred to the Stabilization Fund. These deposits of excess capital gains tax revenues to the state’s Stabilization Fund during periods of economic prosperity would serve as a “cushion” in years when markets decline and capital gains revenues fall. This will help ensure that the state does not build recurring spending on a foundation of volatile revenues and help mitigate the fiscal impact of economic downturns.
Prepared by the Executive Office for Administration and Finance · Rooms 373 & 272 · State House
For more information contact:
Rob Dolan (rob.p.dolan@state.ma.us)
www.mass.gov/budget/governor