Signaling a welcome and necessary agreement last week, House and Senate leaders announced a plan to resolve the retroactive capital gains tax crisis that came to a head in recent weeks. Taxpayers who recently received bills for sales made from January to May 2002 will not have to pay these taxes. Those who paid the tax from May to December 2002 will be issued refunds payable over the course of four years.

Contrary to public rhetoric, the retroactive tax was not imposed maliciously by legislators, but actually after years of concerted attempts on our part to avoid imposing a retroactive tax. While taxing retroactively is both unsound public policy and poses a heavy and unfair burden on many Massachusetts taxpayers, I think it is worth explaining the background of this case in the hope that it will at least paint a clearer picture of how this unfortunate situation came to be.

Strapped for money in the midst of an economic crisis, the Legislature decided in April 2002 to implement a capital gains tax increase. The bill passed with an effective date of May 1, 2002, for all sales made after that date.

Then, not wanting to pay the extra tax, some people (who had capital gains recognized from May 1, 2002 – Dec. 31, 2002) sued in what came to be known as the "Peterson" case. The court ruled that the state cannot change the rate in the middle of the year, but must have an effective date of January 1. So in 2004, the Legislature responded to the court's ruling in two ways. The first provision stated that the rate would be changed as of an effective date of January 1, 2002, but the second provision stated that those who would be affected by capital gains made in January, February, March and April of 2002 would be exempt from the rate change. So in effect, the Legislature was keeping the effective date at May 1, 2002.

But the litigants in the Peterson case sued again. And the court agreed with the people who brought the case – but not in the way those suing wanted it to. The court struck down the section that provided the credit and left intact the section that set the date to January 1, 2002.

The Legislature was left with the choice of collecting an unfair retroactive tax for sales made between January 1, 2002 and May 1, 2002 OR refunding over $250 million to taxpayers who had already paid for capital gains between May 1, 2002 and January 1, 2003.

Neither choice was very attractive. While refunding $250 million in taxes would have posed a hardship on the finances of the state, it became apparent that the retroactive tax would put an unjust burden on many of the Commonwealth’s taxpayers. Citizens made financial decisions based on the (then) current law, only to have it retroactively changed, resulting in new assessments, some for large sums.

The ambiguous and uncoordinated process through which the Department of Revenue sent out the retroactive tax bills resulted in widespread confusion on the part of taxpayers. The lack of clarity and coordination among the Department of Revenue, the Executive Branch, the Legislature, and the public exacerbated an already difficult situation.

Fortunately, the issue will now been resolved by the agreement between the House, Senate, and Governor. The new agreement moves the tax increase effective date up to January 1, 2003, preventing a retroactive tax and satisfying a court mandate that taxpayers be assessed equally in the same calendar year. It will require the Commonwealth to forego the collection of approximately $150 million and to rebate between $56 million and $69 million per year for the next four years.

I would like to commend my colleagues in the Legislature for accepting the burden of fault in this situation and rectifying an unjust policy. Although difficult, repealing the rate change for 2002 is the only responsible option. This was not a partisan issue, but an issue of basic fairness for the citizens of Massachusetts. We struggled with a complex situation, stumbled a bit at first, but, in the end, did the right thing.