Volatility underscores role of cap gains $$$ in state budget

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STATE HOUSE, BOSTON, AUG. 25, 2015…..Over the past few days, the volatility of world stock markets has been on display, as Chinese stock prices have fallen and U.S. stocks rode a roller coaster.

The news has created anxiety among individual investors, but there’s reason for Beacon Hill officials to be concerned as well.

Massachusetts budget writers are counting on capital gains tax income to reach the $1.387 billion estimate agreed to earlier this year. Sales of capital assets, such as stock, real estate and other properties, are subject to the capital gains tax.

“If that comes in short then that could be a problem, but it’s very early in the fiscal year, and that’s only one element,” Senate President Stanley Rosenberg told the News Service in an interview Tuesday. He said it is “too early to tell” whether and how the market might impact the state budget picture.

Lawmakers have treated capital gains revenues more conservatively in recent years after falling stock values in 2001 and 2002 fueled an historic slump in state capital gains revenues, which contributed greatly to the $2.5 billion, 15 percent drop in tax receipts in fiscal 2001. That collapse of revenue spurred the Legislature to raise taxes by $1.2 billion to preserve spending and services. The tax hikes included an increase in the capital gains tax.

In recent years, state law has capped at about $1 billion the amount of capital gains revenues that could be put toward operating budget expenses, with additional amounts diverted towards state reserves.

Facing a midyear budget deficit, lawmakers and Gov. Charlie Baker in February rerouted those excess capital gains revenues into the general fund. Massachusetts Taxpayers Foundation President Eileen McAnneny said fiscal 2015 capital gains tax revenues have come in at about $1.6 billion, exceeding the amount anticipated from the February change.

Though the recent fluctuations have caused some worry, the stock market has been riding a major growth period and the state and national economy have been on a long upswing.

A sell-off by Massachusetts taxpayers could result in a boost to capital gains revenues while capital gains losses or a decrease in sales could depress capital gains tax revenues.

“Financial analysts believe that the immediate market conditions are temporary technical revisions and will not continue. The state’s revenues have been growing steadily, reflecting our relatively stable economy and revenue base,” Administration and Finance Secretary Kristen Lepore said in a statement to the News Service. “Although we do not see a significant risk to the revenues as a result of the recent stock down-turn, we need to remain cautious of the volatility of the stock market and the impact that a longer term downturn could have on capital gains revenue. This is a reminder that we need to be judicious in our use of capital gains with the goal of making deposits to our stabilization fund.”

According to the Baker administration, the Department of Revenue cannot track capital gains by transaction types, though typical transactions include sales of businesses, homes or stocks.

Senate Ways and Means Chairwoman Karen Spilka told the News Service that she and others will be monitoring markets and capital gains revenues. The Ashland Democrat said revenue estimates for fiscal 2016 have been “fairly conservative” and noted that August is only the second month of the fiscal year.

“In the scheme of things this wasn’t as huge as others in the past, and I’m hoping that it’s behind us,” Spilka said of the market fluctuations. Spilka said she would be speaking with her “counterparts” in state government and said, “We all just need to watch it and realize that this is what the stock market by its very nature does.”

The Legislature followed Baker’s lead this year in lifting the cap of roughly $1 billion in capital gains revenues that can be used for the operating budget. The Senate had proposed a new threshold of about $1.38 billion, with any additional revenues going toward the stabilization fund, as well as state retirement benefits and pension liability, but the final budget completely suspended the statute moving excess capital gains into reserves.

McAnneny agreed with Spilka’s approach of watching the situation.

“It’s early on in the year so we don’t want to be sounding the alarm bell,” said McAnneny. She said, “We don’t’ know at this point how much of that may be at risk.”

In fiscal 2012, the final capital gains revenue taken in by the state was $994.3 million, below the statutory threshold, according to state records. The fiscal 2013 capital gains revenue well exceeded the roughly $1 billion threshold, pouring about $467 million into state reserves and retiree liabilities.

“We’re hoping still to put some funds toward the rainy day fund for fiscal year 2015,” Spilka said. The Legislature has not yet taken up a bill closing the books on fiscal 2015.

Copyright 2015 State House News Service

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