Proposed capital gains proposal aimed at progressive tax reform

House speaker says Legislature will take up revenue reform discussion later in year

Yawu Miller

Yawu Miller is the former senior editor of the Bay State Banner. He has written for the Banner since 1988.... VIEW BIO

Cambridge State Rep. Mike Connolly last week advanced a budget amendment that would raise taxes on dividends and interest from the current 5.05 percent to 8.95 percent, a move he said could generate more than $1 billion in revenue at a time when state officials are struggling to invest more in education and transportation in Massachusetts.

On Monday, Connolly withdrew the amendment, after House Speaker Robert DeLeo said he wants the House to wait until later in the year to consider new revenues. While Connolly’s proposal won’t move forward in time to effect change in the proposed $42 billion House budget, the lawmaker says his amendment will help the Legislature think big when it comes to revenue reform.

“This is a starting point,” he told the Banner. “I hope to push us in the direction of doing large, progressive reforms rather than small, regressive fees.”

When William Weld was elected governor in 1990, ushering in a wave of Republicans in the corner office, he touted the promise of a leaner, more efficient state government and lower taxes. He and his Republican successors delivered on the tax cuts, shaving points off the state’s income tax and dropping the rate on capital gains taxes from 6 percent down to 5 percent. Along with cuts to taxes on dividends and interest, the combined effect was a reduction of approximately $3 billion in state revenue, according to the Massachusetts Budget and Policy Center, a Boston-based think tank.

Over the last 20 or so years, state spending on critical areas such as education and transportation infrastructure has not kept pace with rising costs, leading to a widely-acknowledged deficit in state education spending, billions of dollars of deferred maintenance in the MBTA system and a backlog of repairs on state roads and bridges.

Connolly points to an increase in the rate of homelessness that is higher than almost anywhere else in the nation.

“We have seen the incidence of family homelessness double over the last decade,” he said.

Governors and the state’s often conservative-leaning Democratic leadership in the Legislature have generally shied away from large increases in revenue, instead raising fees such as tolls, tuition at public colleges and universities, and MBTA fares.

In recent years, legislators were banking on the passage of the Fair Share Amendment, a constitutional amendment that, if approved by voters, would raise an estimated $2 billion a year by taxing income in excess of $1 million at 9 percent, reflecting a 4 percent surtax on that portion of income. But after four years of preparation by backers of the initiative, an alliance of business groups successfully challenged the amendment. Legislators have filed a similar amendment that they say would stand up to a court challenge, but any amendment to the state constitution must undergo a lengthy, four-year process before it can be placed on the ballot.

“For about five years, those of us who are progressive have been counting on the Fair Share Amendment to raise revenue,” Connolly said. “We support the second initiative, but that’s several years away.”

Like the Fair Share Amendment, Connolly’s tax on capital gains would target the state’s wealthiest individuals. Although people of all income levels can invest, typically only high-income households derive significant income from investments. According to the Mass Budget and Policy Center, 80 percent of capital gains income goes to the wealthiest 1 percent of Massachusetts households.

Connolly says he is in support of any revenue proposals that raise taxes on those who have the greatest ability to pay more.

“I think our job this year has to be to raise revenue in a progressive way by asking the state’s wealthiest to pay their fair share,” he said.