Gov. Mitt Romney Friday filed legislation to return approximately $250 million in 2002 state capital gains taxes to 145,000 investors, leading several strategists to suggest the Republican governor was aiming his anti-tax message at presidential primary voters as much as Massachusetts taxpayers.
Beacon Hill Democrats have shown little appetite to rebate the 2002 capital gains taxes, which are at the center of a Supreme Judicial Court decision earlier this year. As a result, Democrats and Republicans alike Friday speculated that the governor, who is weighing a run for the White House in 2008, was sending a signal to conservatives beyond the Bay State.
"Primary voters and general election voters want to know, 'Do you cut taxes when you have the chance, (and) have you fought for that hard?' " said Grover Norquist, president of Americans for Tax Reform, a politically influential anti-tax advocacy group based in Washington. "If you've tried, you've signaled your intentions. It tells you, given a Republican House and Senate (in Washington), these are the sorts of things I'd be doing."
Norquist earlier this year was sharply critical of Romney's proposal to close $170 million in corporate tax loopholes, saying the package was tantamount to imposing "stupid tax laws in a Draconian way." Less than a month later, Romney backed off his plan, saying it would hurt the state's efforts to attract new employers.
In an interview Friday, Norquist said Romney's staff has kept in much closer contact with Americans for Tax Reform since then, and a month ago, Romney took part in a nationwide conference call with the group's members to discuss tax policy.
Romney's proposal comes nearly two months after the Supreme Judicial Court ruled that a 2002 change to the state's capital gains tax rate was unconstitutional because it took effect on May 1, 2002, almost halfway into the tax year. The court said the Legislature had two options: roll back the effective date of the rate change to Jan. 1, 2002, which would mean collecting an additional $150 million from 120,000 taxpayers who saw capital gains between Jan. 1, 2002, and April 30, 2002; or push the effective date forward to Jan. 1, 2003, and return between $225 million and $275 million in capital gains taxes the state has already collected.
Romney argues that pushing the date back to Jan. 1, 2002, which will happen automatically under the terms of the SJC decision, would be unfair because it would tax gains retroactively, to a period when investors could not have been aware of the tax impact of their transactions.
"It is fundamentally unfair to tax people retroactively," Romney said in a news release Friday. "If we are to keep faith with the taxpayers of Massachusetts, we need to correct the constitutional error that occurred here."
Democrats and a liberal watchdog group, however, said Romney's response to the SJC ruling is even more unfair because it would wipe out any taxes on a wide array of capital gains from 2002, even though low- and middle-income wage earners paid 5.3 percent on their wages at that same time. Under the old capital gains tax rate structure, gains on assets held six years or more were not subject to any taxes, and gains on other investments ranged from 1 percent to 5 percent.
"There's nothing unfair about saying our highest-earning taxpayers should pay at the same rate on their capital gains income that ordinary taxpayers pay on their wages," said Noah Berger, executive director of the Massachusetts Budget and Policy Center, a liberal watchdog group.
Berger's organization, in analyzing 2001 state tax data, has determined that three-quarters of the tax money that would be returned by Romney's bill would go to households that averaged $1.5 million in annual income.
Some legislative Democrats view Romney's filing of the tax rebate bill in purely political terms, and not as a bid to pad the wallets of the rich in Massachusetts.
"The truth is, this is another example of Mitt Romney selling out the people of Massachusetts in order to boost his credentials as a hard-liner on the national stage as he gets ready for a presidential run," said state Representative J. James Marzilli Jr., an Arlington Democrat who took part in an unsuccessful effort to strike a compromise solution to the capital gains dilemma.
"We don't have a quarter of a billion dollars to burn, and this money belongs to the taxpayers of Massachusetts, and not a handful of millionaires."
A Republican strategist with close ties to the Romney administration said Friday that he also tended to view Romney's tax-rebate bill as more of a symbolic gesture than an earnest attempt to push though legislation.
"It builds a record even if it goes nowhere," the strategist said of the bill. "Tax cutting is certainly popular in Republican primaries, and they got knocked around pretty good by Grover Norquist on the tax loopholes. There's some sensitivity there."
Eric Fehrnstrom, Romney's communications director, said the governor was only doing what he believes is right.
"This has nothing to do with politics and everything to do with treating our taxpayers with the respect they deserve and maintaining a system of taxation that is fair, honest, and transparent," Fehrnstrom said.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-backed watchdog group, agreed that rolling the effective date of the capital gains rate change to Jan. 1, 2002, was "unfair." He said that Romney's plan, however, would do damage to the fiscal health of the state and that the money would have to come from reserve accounts.
Widmer added that he has strong doubts Democratic leaders in the House and Senate have any intention or desire to go in the same direction as Romney in response to the SJC ruling.
"There's talk of 1/8higher funding for 3/8 early childhood education, higher education fund restoration, and healthcare coverage expansion," Widmer said. "There's enormous pressure and a lot of important needs to be addressed."
Barbara Anderson, executive director of the antitax group Citizens for Limited Taxation, saw it differently.
"Massachusetts voters don't elect Republican governors to get things done: We choose them to defend ourselves against things being done to us!" Anderson said Friday in an e-mail. "This cap gains issue is a perfect example of that."