Massachusetts: A $1B budget imbalance, Watchdog group urges state cuts

"The current level of spending is unsustainable, and there is no plan to deal with the economic and fiscal challenges ahead," according to a budget warning sent out by the taxpayers foundation.

One of the biggest threats to the state's financial stability is a potential drop in the capital gains tax revenue, said Michael Widmer, president of the taxpayers group.

Projected capital gains revenue accounts for roughly $1.7 billion in the proposed state budget. But capital gains revenue, high when Wall Street is surging, typically dries up during a downturn.

Capital gains tax revenue, for example, plunged 75 percent in 2001 during the previous recession.

While Widmer is not predicting another 75 percent plunge, even a drop of 25 percent would wipe out $400 million in projected revenue, he said.