Metro

Lawmaker proposes Mass. capital gains tax increase

A state representative from Cambridge wants to raise the state’s capital gains tax in order to generate more than $1 billion in new revenue for the state each year, but at least one fiscal watchdog worries that could backfire by discouraging investment.

A budget amendment proposed by Representative Mike Connolly would boost the state’s tax rate on long-term capital gains to 8.95 percent from its current 5.05 percent. The Democrat said he would be prepared to debate the amendment on the floor next week, though House Speaker Robert DeLeo has signaled he’d like to wait longer before considering new tax proposals.

“I think what’s so appealing about it as a progressive is that 80 percent of capital gains goes to the top 1 percent of Massachusetts households, according to the Mass. Budget and Policy Center, so I would say it’s unassailably progressive to want to raise revenue from capital gains,” Connolly said.

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Connolly said he was inspired to file the amendment by a January report from the Massachusetts Budget and Policy center detailing 14 options for raising “progressive revenue.” That report said the state currently receives about $1.7 billion annually from capital gains taxes, and each one percentage point increase in the rate would generate about $300 million in additional annual revenue.

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“Raising the tax rates on ‘unearned income’ would be a highly progressive way to raise additional revenue because ownership of these assets (especially financial assets such as stocks, bonds and cash holdings) is narrowly concentrated in top-income households,” the report said.

The $42.7 billion budget the House Ways and Means Committee rolled out last week does not propose any broad-based tax hikes, and it omitted proposals from Governor Charlie Baker to impose an excise tax on opioid manufacturers and extend the tobacco tax to e-cigarettes.

Most of the more than 1,300 amendments House lawmakers filed steer clear of the issue of taxes. Minority Leader Brad Jones has proposed adding the governor’s opioid and tobacco taxes, and Billerica Republican Representative Marc Lombardo offered amendments that would lower both the sales and income tax rates to 5 percent.

DeLeo has said he wants the House to consider new revenue proposals later this year, after committees have had time to vet various pieces of legislation. Connolly’s amendment, however, could spark debate moving forward about whether the capital gains tax rate is one that could be raised without hurting the economy to net additional money for state investments.

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Addressing the Greater Boston Chamber of Commerce last month, DeLeo asked business leaders for their input on policies to improve transportation in Massachusetts and afterwards told reporters that “it’s all on the table” when it comes to possible new revenue for transportation.

Connolly said he found those remarks, and the prospect of a future revenue discussion, “encouraging.”

“I think what I want to make sure is that as part of this revenue picture, we really look toward progressive approaches,” he said. “I wouldn’t want to see us simply rely on more regressive approaches.”

Massachusetts Taxpayers Foundation President Eileen McAnneny said lawmakers should be “very careful” in considering changes to the capital gains tax rate, warning of potential unintended consequences like discouraging people from investing or saving. McAnneny noted that money a person invests has often already been taxed when it is earned as income.

“We’re a state that relies a lot on innovators and entrepreneurs and investors to provide capital up front, so we have to be really careful,” she told the News Service. “We don’t want to hurt a lot of the underpinnings of our economy.”

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Nine states, including New Hampshire, do not impose a state capital gains tax. Elsewhere nearby, Maine taxes capital gains at rates of up to 7.15 percent and Connecticut up to 7 percent. Connolly, in a message pitching his amendment to other lawmakers, said an increase to 8.95 percent would put Massachusetts “more in line with many other states such as New York, Vermont, Maine, Minnesota, Oregon, California, and others.”

As of noon Thursday, two dozen other House Democrats were backing Connolly’s amendment — he said he’s been “really gratified” by the response from his colleagues — and the Massachusetts Teachers Association and Public Higher Education Network of Massachusetts have also voiced support.

The amendment does not seek to dedicate revenue from a higher capital gains tax to any specific purpose.