The MassINC brief reveals the volatile capital gains tax as the largest source of revenue growth in recent years. Capital gains tax revenues plummet during recessions, while demand for state services does not.

"Given these multi-year trends on both the revenue side and the spending side, the Commonwealth now finds itself in an extremely precarious position," said MassINC president Greg Torres. "We have gradually introduced an unsustainable level of risk and volatility to both sides of the ledger. As the current economic slowdown turns into a recession, we are moving into uncharted financial waters."

State revenues are expected to increase by $750 million to $1 billion based on the long-term projections, far short of the $1.3 - $1.6 billion needed to match likely spending growth.

Between 2002 and 2006, capital gains tax generated most of the revenue growth that bridged the gap between overall revenues and spending. The tax brought in a high of $1.7 billion in 2006, but those receipts could easily evaporate. Capital gains taxes dropped by 3/4 during the 1987-91 recession and by 2/3 after September 11, 2001.

"Relying on capital gains for budget growth introduces enormous risk into the policymaking process," explained Cameron Huff, author of the policy brief. "The state is already struggling with health care and other costs that exceed its ongoing revenue capacity. A major, sustained decline in capital gains receipts clearly would plunge the state's finances into crisis."

Cameron Huff, Point of Reckoning: Two Decades of State Budget Trends

Health care spending dominates the state's on-going programs, according to the policy brief, almost doubling from 16 percent of the state's budget in 1987 to 30 percent in 2006.

Of this spending, 90 percent is dedicated to Medicaid, an entitlement that provides health care to the poor. The program's annual cost increases are not only large, but also unpredictable and outside the control of state administrators. The State's new universal health care law adds additional fiscal uncertainty.