Op-ed in MetroWest Daily News

Here is my op-ed from the MetroWest Daily News.

Retroactive tax sends wrong message
By Irwin Jungreis / Guest Columnist
Sunday, November 20, 2005

At the close of the last decade a friend and I left secure positions and started a new business in a risky but promising area of the construction industry. To fund it we invested a fair part of our life savings, raising additional money from other investors.

Within a few years we were employing dozens of people, creating new jobs where none had existed before. We all worked long hours because we believed passionately in what we were doing.

In 2001, like many other businesses, we experienced a significant reversal of fortune in our new enterprise due to the recession following 9/11. To avoid laying people off I took a calculated personal risk and gave up my entire salary for stock. At the time I wondered if I would ever again have a paycheck from my business, or regain even a portion of my investment.

But in April 2002, our risk, sacrifice, and hard work paid off in a way we had not anticipated. A large firm in our industry approached us and we sold our business.

As a result, I received an once-in-a-lifetime capital gain. By design, our employees also participated in the windfall, enjoying a well-deserved reward for their dedication and effort. The American dream had come true for all of us.

But now, after having sold our company and paid our taxes over three years ago, both the founders and employees of our former business will be taxed again by means of a capricious new law. Our lawmakers have rewarded hard work and good fortune with a slap in the face.

How can this be in a state that prides itself on its spirit of enterprise; that tries through scores of incentive and tax give back programs to attract the risk takers and entrepreneurs so vital to maintaining our knowledge-based economy?

Here's how: In 2002, with tax revenues in free fall, the Legislature increased the tax rate on long-term capital gains, with May 1, 2002 slated for the law to go into effect.

In 2005, the Supreme Judicial Court reviewed the Legislature's decision. In Peterson v. Commissioner of Revenue, 444 Mass. 128, the court ruled that the effective date of the tax increase could not be mid-year.

The court then set the increase back to January 1, 2002. Taxpayers who reported capital gains in the first half of 2002 would be billed for the new tax, regardless as to whether they had already paid capital gains under the old law.

Some in the Massachusetts House see the unfairness of this form of public double dipping and are considering a bill (H.B. 4165) that would set the effective date of the increase to January 1, 2003. In doing so they seek to remedy a class of individuals, including my colleagues and me, whose once-in-a-lifetime good fortune has in part been tainted.

Some might say the difference between the old and new rates is only a few percentage points (anywhere from 0.3 percent to 5.3 percent, depending on holding period). How can it be unreasonable to raise the tax rate by a few percent? Won't the change only affect wealthy individuals who can easily afford to pay, and aren't capital gains earned on nothing more than the strength of a phone call and a stock sale?

The rate at which capital gains are taxed in Massachusetts is not at issue here. My position speaks to when one is taxed, and for what reason. A new tax bill issued now to someone who realized income years ago and has already paid taxes does so without reference to personal circumstance and common fairness.

Now it is 2005 and my new, entirely unanticipated, retroactive tax bill is larger than my annual salary.

It is not just for entrepreneurs that the Legislature must maintain a standard of reasonableness. No one should have to live with the fear that improvised law of the most opportunistic sort will create unwarranted penalties disproportionate to circumstance.

The Legislature must act to remedy an unjust law that is both an oversight and an insult to personal initiative and new enterprise.

Irwin Jungreis lives in Sudbury.

Introduction

It is hard to believe, but 48000 Massachusetts taxpayers have received or will soon receive tax bills, including interest, for income they received more than 3 years ago in early 2002 and already paid taxes on. Anyone who reported long term capital gains for the period 1/1/02 – 4/30/02 is affected.

This BLOG is intended to be an information resource for those who are fighting this retroactive tax increase, whether they are directly affected or only oppose it due to its inherent unfairness.

Here’s how this retroactive tax increase came about. During 2002, the tax rate on long-term capital gains was increased, effective May 1, 2002. In 2005 (Peterson v. Commissioner of Revenue, 444 Mass. 128) the Supreme Judicial Court ruled that the rates cannot be changed mid-year and the court reset the effective date of the increase to January 1, 2002. Taxpayers who reported capital gains in early 2002 are now being billed for the difference between the old and new tax rates, plus three years of interest.

The Supreme court ruling left open to the legislature the possibility to change the effective date of the tax increase to 1/1/03. That would mean that there would be no retroactive tax increase, but it would also mean that the state would have to refund taxes to anyone who reported a capital gain from 5/1/02 – 12/31/02. Such refunds would total over $200 million.

Here is a document from the Department of Revenue with more detailed information on the retroactive tax: TIR 05-13

During November, the legislature passed a bill (HB 4169) which eliminates the interest and exempts anyone for whom the total amount due is less than $100. However, this bill did not become law because the governor did not sign it. Instead, Governor Romney sent it back to the legislature with an amendment that would set the effective date of the tax increase to 1/1/03. Taxes paid at the higher rate for the period 5/1/02-12/31/02 would be refunded to the taxpayers over 3 years rather than all at once to lessen the impact to the state budget, an idea the Governor credits to Senator Cynthia Creem, cochairman of the Joint Committee on Revenue. Here is Governor Romney’s press release: ROMNEY PROPOSES TAX FIX TO PREVENT RETROACTIVE TAXATION

Information on how to fight the tax increase can be found at www.noretrotax.org. That web site was created by CITIZENS AGAINST RETROACTIVE TAXATION, a group formed by Mark Bernardin and others for this purpose.

Some historical perspective on this tax can be found on the web site of Citizens for Limited Taxation here: The Unconscionable Retroactive Tax.