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Taxing common sense

TAXES ARE unpopular enough without being imposed retroactively. Massachusetts residents who are being hit with capital gains tax bills from the first half of 2002 deserve a refund.

The problem dates to the Legislature's vote in 2002 to raise capital gains tax rates beginning on May 1 of that year. The Supreme Judicial Court ruled in 2004 that, under the Massachusetts Constitution, taxes cannot be raised midyear. The SJC gave the Legislature a choice: Put off the tax increase to January 2003 or impose it retroactively to January 2002. The Legislature chose the latter path, which brought in more revenue to the state but is unfair to residents who made financial decisions, such as whether to sell a home, under one set of tax expectations only to have them change after the fact.

Initially the Revenue Department delayed sending out the retroactive tax bills, hoping that the Legislature would devise a solution. But preliminary assessments went out earlier this month, and the only relief from the Legislature was a plan to forgive the tax for people who would pay $100 or less and a waiver of interest payments for everybody else.

That proposal was included in a broader bill closing tax loopholes. Governor Romney sent the entire bill back with a suggestion that the lawmakers reject retroactivity in favor of a phased-in refund -- about $250 million spread over three years. The Legislature should adopt Romney's plan.

It would involve a loss of revenue of about $85 million this fiscal year as well as in 2007 and 2008, money that could be spent on education and social programs. But the retroactive tax bills are so unfair that the state should send back the money. A phased-in process would reduce the strain on the budget, and revenues are growing sufficiently so the refunds would not cause a crisis.

The governor's plan builds on suggestions by Senator Cynthia Creem, a Newton Democrat who is cochairman of the Revenue Committee, and lawyers for Engel and Schultz, a Boston law firm that brought the suit which prompted the SJC decision. Creem's support shows that the plan enjoys bipartisan backing. A spokesman for Engel and Schultz says the firm would forgo another lawsuit if the Legislature adopted the governor's plan. It's time to refund the money and get the question out of the courts.

Many of the 157,000 people eligible for refunds are quite wealthy. Romney himself might get one, which he said he would donate to charity. But many are middle-class people who generated capital gains in 2002. Wealthy or not, they should not be taxed retroactively. The Legislature would send a strong message about its commitment to sound tax policy by adopting the governor's plan.

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