Capital Gains A Capital Pain | Local biotech entrepreneur laments Bay State's tax structure
Capital gains tax rates in Massachusetts continue to be a topic of discussion among entrepreneurs and business groups, even more so with the economy officially in recession.
A recent report by the Virginia-based Small Business & Entrepreneurial Council ranks the state as 26th in the country for individual capital gains taxes and 47th in the country for corporate capital gains taxes. And on this list, being at the bottom is bad.
Regional Perspective
In the Bay State, the individual capital gains tax is 5.3 percent for long-term gains and 12 percent for short-term gains while the corporate capital gains tax is 9.5 percent.
The capital gains tax in the state works as follows: individuals pay on their personal gains from the sale of stocks or other investments.
The corporate capital gains taxes are paid by companies when they sell off investments of real estate, buildings or equipment and make a profit or gain from that sale.
When it comes to corporate capital gains, the other five New England states all have lower rates: Connecticut with 7.5 percent, New Hampshire and Vermont with 8.5 percent, Maine with 8.93 percent and Rhode Island with 9 percent.
With individual capital gains, Massachusetts fares a little better when compared to its New England compatriots. New Hampshire has no capital gains tax and Connecticut’s is at 5 percent. Vermont is at 5.7 percent, Rhode Island is 6.5 percent and Maine is 8.5 percent.
Given Massachusetts poor record when it comes to corporate gains, it’s probably not a shock that during a tour of 21st Century Biochemicals in Marlborough, its founder, Jordan Fishman, brought up the topic of capital gains taxes when asked by State Rep. Carolyn Dykema, D-Holliston, what was on his mind as a businessman.
Dykema was recently appointed to the Joint Committee on Community Development and Small Business on Beacon Hill. She said she attended the tour of 21st Century Biochemicals to collect ideas and bring the ideas back to the committee.
For Fishman, whose company makes custom peptides for biotech research, “capital gains taxes are a big deal.”
“They’re catching the wrong fish with the net,” he said of capital gains taxes during a follow-up interview a few days after the tour.
Approximately $1.5 billion of last year’s state budget came from capital gains taxes.
Fishman’s point of view is not unlike many entrepreneurs. And he’s not new to the game of corporate gains or owning his own business.
He has worked as a professor and researcher at the UMass Medical School in Worcester and before that at Boston University Medical Center.
He also ran a company with his father, David S. Fishman, which was called Quality Controlled Biochemicals Inc. in Hop-kinton. They sold that company, which also made custom peptides, to BioSource International.
The risks that entrepreneurs face in starting a small business are so great that the odds of surviving are not very high, according to Fishman. High capital gains taxes make it less attractive for some to take those risks, Fishman said.
The capital gains taxes also affect venture capitalists, who “provide the gas for the economy.”
“If they (VCs) can’t get a return on their investment that meets their satisfaction, then they won’t invest,” Fishman said.
Of course, in today’s economic environment, the prospect of lowering a tax on corporate or personal capital gains is slim. The state is facing a $1 billion shortfall and is in the midst of what promises to be a difficult and politically charged budget season.
Capital Co-Dependence
There’s another aspect to the capital gains taxes here in Massachusetts: we rely too heavily on them for our budget.
We are third in the nation in our dependence on capital gains taxes for our budget, and it is a “volatile” tax to rely upon because it goes up and down with the economy.
At a time when the state needs money more desperately than ever, revenues from many sources are down, but with capital gains it is even more the case. As the financial sector continues to limp along, the state has much less of a tax than usual because people are not making the same kind of gains selling stocks, as many of them are worth much less right now.
Part of Massachusetts’ problems stem in part from a high concentration of financial services in the state, which do well or not according to the economy, according to a recent report by MassINC, a nonprofit think tank in Boston.
It’s a recurring problem: six years ago, “inflation-adjusted capital gains revenues plummeted by more than $1 billion” according to MassInc, and in the early 1990s, the capital gains revenues dropped by almost $900 million.
Both times, the state budget was severely impacted.
Gov. Deval Patrick has proposed to manage the use of the state’s capital gains taxes differently so there are no continuing shortfalls. The proposal looks to shift excess capital gains taxes in good years into a special fund that would be tapped for the general budget during years when there are not as much capital gains taxes.
One political tax idea is appealing to Fishman. President Barack Obama has promised to work toward getting rid of capital gains taxes on startups and small businesses.
“That’s one idea that would really help,” Fishman said.
Got an idea for our Biotech Buzz column? E-mail WBJ Staff Writer Eileen Kennedy at ekennedy@wbjournal.com.
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