Budget surplus perches on heap of capital gains Which means it could vanish with stock profits

The Economy

October 11, 1998|By Jay Hancock

Just as stock owners have found they are not the geniuses they supposed, so too are government financiers fixing for comeuppance.

Flush treasuries have prompted high-fives and hot pockets in capitals across the land.

President Clinton heralded the federal budget surplus for fiscal 1998 as the breaking of "the spell that had gripped America" for three decades.

In Maryland, the brimming till prompts more tax-cut talk and glimmers of new programs.

But, before the money is spent, it's worth bending down to see which pipes it's coming from and how full the tanks are at the other end. Maybe not that full.

For the fiscal year just ended, the federal government booked a surplus of more than $70 billion.

Maryland finished $117 million in the black, and state officials keep revising future revenue estimates upward.

The economy gets the credit. Higher corporate profits and a record number of workers on the tax rolls have stacked high the collection plate.

One small, freakish part of the economy, however, gets disproportionate praise. The surge in personal income taxes can't be explained completely by employment and salary increases. Something else is going on.

In Maryland, for example, personal income-tax receipts have been popping by 8 percent annually. That's probably three times as fast as the state's overall economic expansion, prompting guessing and probing as to the source of the foam.

Fiscal analysts think they've found it. In lower Manhattan.

As American stocks have doubled and doubled and doubled again since the early 1980s, investors have started selling them, creating capital gains and becoming liable for capital gains taxes.

The selling has increased lately, first as the government cut the capital gains tax, then as stocks broached new highs in the first seven months of this year, finally as they plunged by 20 percent and more since August.

Because stock players are reaping the gains of the long bull market, fiscal experts believe, governments are enjoying unusual and nearly unprecedented revenue surges.

In Maryland, "capital-gains realizations have more than tripled in about five years," said Ann Franklin, chief economist for the state's Board of Revenue Estimates. "That's just phenomenal."

So too for the country. Swelling capital-gains taxes are believed to be responsible for a big part of the federal government's surplus, said Gary Robbins, an economist with the Institute for Policy Innovation in Washington.

An analyst at Lehman Brothers figured that Microsoft founders Bill Gates and Paul Allen alone accounted for $1 billion in capital gains tax bills.

Nobody knows for sure the source of the swell. It takes years for analysts to dissect tax records and figure what came from where. But a capital-gains balloon seems the best explanation.

In Maryland, where junior investment houses and high household incomes yield good stock-market exposure, capital-gains realizations are estimated to have soared by half both in 1996 and 1997.

Capital gains account for almost 10 percent of taxable personal income in Maryland, Franklin said, up from less than 5 percent in the early 1990s.

But as mutual-fund owners are learning, the stock market goes both ways. Same for stock-derived tax spurts.

Analysts expect a continued, and maybe even bigger, surge of capital-gains taxes into next year. The market's recent turbulence has caused unnerved investors to close positions and reap gains on stocks they haven't touched in years. But after that, the flow is expected to slow. And the greater economy isn't looking too strong itself lately.

J. P. Morgan last week forecast a recession for the U.S. economy in 1999, which would put further pressure on corporate profits, raise unemployment, hurt tax collections and throw forecasts of future budget surpluses in a different light.

"I would bet that, by next January, we won't hear again that we're going to put a budget surplus aside for Social Security," Robbins said. "And it won't have anything to do with cutting taxes."

Pub Date: 10/11/98

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