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Tax Law

State Net Capitol Journal – August 12, 2013; Massachusetts Approves Sales Tax Holiday

Budget & Taxes

MA APPROVES SALES TAX HOLIDAY: Last week, Massachusetts became the 18th state to approve a back-to-school sales tax holiday this year, when Gov. Deval Patrick (D) signed legislation designating the weekend of Aug. 10 tax free.

The tax holiday will be Massachusetts' ninth in 10 years. (The state didn't have one in 2009, during the worst of the recession.) And it will be one of the broadest in the country, temporarily suspending the state's 6.25 percent sales tax on virtually everything but cars, restaurant meals and tobacco.

The tax holiday is expected to cost the state about $20 million in revenue, but Sen. Michael R. Knapik (R) said legislative support coalesced around the plan (SB 175) when the state's Department of Revenue reported that tax collections were up 4.8 percent over last year and $627 million above projections. In a statement, he said the tax holiday will allow families "to save some of their hard-earned money, especially during back-to-school time," adding that it would also be "helpful to area businesses which have traditionally seen enormous increases in transactions on these days." (STATELINE.ORG, STATE NET)

RI BETS BIG ON HEDGE FUNDS: Rhode Island has put 14 percent, or $1 billion, of its $7.5 billion in pension fund assets into a form of investment generally considered the exclusive province of sophisticated money managers and wealthy investors: hedge funds. The state is now short selling, leveraging and spread trading in Asian futures, distressed securities and residential mortgage-backed securities by virtue of its holdings in 18 separate funds.

The state's treasurer, Gina M. Raimondo, and the State Investment Commission, maintain the investments are a prudent way to lower market risk and volatility, which has become vital since the 2008 stock market crash wiped out 25 percent of the state's pension fund, forcing the state to shell out more than $924 million last year for retiree benefits.

Many investment professionals say hedge funds offer better protection against another major stock-market downturn than the traditional "hedge" investment, bonds, with interest rates so low. By investing in things that aren't correlated to the stock market, they say, hedge funds smooth out the market's ups and downs.

But critics argue that hedge funds have lagged well behind the market in recent years and the only ones getting rich from them are the Wall Street tycoons who run them. The recent performance of Rhode Island's hedge fund investments seems to bear that out. In the 2012-13 fiscal year, Rhode Island's hedge fund portfolio earned 11.22 percent, while the Russell 3000 stock index earned 21.46 percent. During that same period, the state paid an estimated $45 million in hedge fund management and performance fees.

"They're turning the pension fund into a fee machine for Wall Street," said Daniel Pedrotty of the American Federation of Teachers. "In the years since 2008, the stock market has roared back. Hedge funds have not. It's a disturbing story."

But at a recent Investment Commission meeting Raimondo, a former venture capitalist who is considering a run for governor in 2014, said although she is "troubled by the fees," the commission has "reduced risk substantially."

"A year and a half ago we sat around this table talking about how we've got to protect people's pensions," she said. "We put in place a risk strategy. We monitor these guys. It's working. So I say, let's stay the course." (PROVIDENCE JOURNAL)

PRIVATE EQUITY FUND INVESTING IN POT: A pair of experienced investment bankers are moving into the marijuana business. They've set up a private equity firm that will buy up businesses in the medical marijuana industry and the nascent market for legalized recreational pot.

Brendan Kennedy, one of the cofounders of Privateer Holdings, which has offices in California, Colorado and Washington, said a recent Fox News poll shows 85 percent of Americans support doctor-prescribed medical marijuana.

"You can't get 85 percent of Americans to agree on anything, but they agree on that. Cannabis is mainstream, and we just need to create mainstream companies now," he said.

Kennedy and cofounder Michael Blue intend to focus on businesses that provide ancillary goods and services like insurance and specialized software for which they see a market of perhaps $10 billion a year.

"We're interested in companies that change the conversation," Kennedy said.

Wharton Assistant Professor of Management Ethan Mollick said private equity will bring credibility to the marijuana business.

"I think you're seeing that process beginning or has already begun but gathering steam in cannabis," he said.

But Harvard economist Jeffrey Miron believes Blue and Kennedy are overestimating the size of their potential market and that it will be hard for marijuana businesses to thrive until marijuana is legal under federal law.

"To me, there's still a lot of hurdles that have to be jumped through, and it could be five years, 10 years, 20 years before the federal law actually changes. So my hat's off to them, but I don't think I would invest with them at this point," he said.

Others are investing, however. Privateer Holdings, has already raised $7 million. (NATIONAL PUBLIC RADIO)

BUDGETS IN BRIEF: The Obama administration has granted school districts in Los Angeles, San Francisco and six other CALIFORNIA cities at least a one-year reprieve from the requirements of the federal No Child Left Behind law, a waiver that has previously been granted only to states. In exchange, the districts have promised to evaluate schools, teachers and administrators using a range of measures including test scores, attendance and graduation rates (SAN FRANCISCO CHRONICLE). • CONNECTICUT Comptroller Kevin Lembo confirmed this month that the state will end the current fiscal year with a $360 million budget surplus. The state plans to use about $220 million of it for next fiscal year's budget and deposit the remaining roughly $130 million in the state's Rainy Day fund (NEW HAVEN REGISTER).

- Compiled by KOREY CLARK

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