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Bay State recovery spurs bill for tax cut

Reduction hangs on local aid hike

With state tax revenues soaring, lawmakers on Beacon Hill are advancing a proposal to lower the Massachusetts income tax rate, if state spending is restored to levels last seen before the fiscal crisis began three years ago.

The Senate unanimously approved a Republican measure Thursday that would trigger a series of income tax rate reductions to lower the rate to 5 percent from 5.3 percent, but only if state spending on education and municipal services reaches 2002 levels. The fiscal crisis prompted lawmakers to slash funding that year.

Passage of the bill by the Senate, where the Democrats have a large majority, is the first sign that Democrats may be warming to the idea of an income tax cut, after repeated calls for tax relief by Governor Mitt Romney. In 2000 voters approved a ballot question that called for rolling back the income tax rate to 5 percent, but Democrats in the Legislature have refused, saying the state could not afford to lose the estimated $600 million a year in tax revenues.

''If we pay our bills and the rest of our services are at a safe level, then why wouldn't I want to decrease the taxes?" said Senator Marc R. Pacheco, a Taunton Democrat, reflecting the effort to reach a balance between a politically popular tax cut and the continued demand for services. ''But all those things have to be in place."

Senator Richard R. Tisei, Republican of Wakefield, who authored the tax amendment with Senator Bruce E. Tarr, Republican of Gloucester, said he was surprised that the measure sailed through the Senate after so much resistance to income tax cuts.

Tisei attributed its passage to the state's improving financial position. ''It's shocking," he said. ''You win one every now and then. Bruce and I had to pinch ourselves."

House Democrats said they were blindsided by the proposal. Kimberly Haberlin, a spokeswoman for House Speaker Salvatore F. DiMasi, left open the possibility yesterday that the House could take it up this week before lawmakers go on summer break. The Tisei-Tarr amendment was offered without prior consultation with Romney's administration, which dismissed it yesterday as an inadequate response to the governor's longstanding demand for an immediate tax cut.

Under the proposed legislation, the state income tax rate would drop by 0.1 percentage point annually for three years if the state restores funding for municipal education and services to levels not seen since fiscal 2002.

Tarr said the gradual tax cut process would begin the January following the passage of such a spending plan. He said the income tax cuts would continue even if state spending subsequently fell below the 2002 levels.

The legislation requires that each of three categories of local spending reaches the 2002 mark to trigger the tax cuts. Only one of the three main budget categories that deal with local aid, so-called Chapter 70 money for education, has returned to the 2002 level. A second, derived from the state lottery, is expected to exceed 2002 levels by next year. Lawmakers would have to pump about $100 million more into the third category, called ''additional assistance" for struggling communities, to reach the tax-cut goal in the proposed legislation.

The revenue picture has improved dramatically in recent months. Yesterday, the state Department of Revenue announced that it collected a record $17 billion in taxes in fiscal 2005, which ended June 30. That's a 7.1 percent rise over fiscal 2004. Income tax revenue alone rose 9.7 percent, an increase of $860 million.

Romney's press secretary, Julie Teer, said yesterday that the governor was not satisfied with the Senate's attempt at compromise.

''While we appreciate the creative thinking of the Senate, we do not see any reason to condition rolling back the income tax to 5.0 percent on anything other than the overwhelming vote of the people to do so," Teer said in an e-mailed statement.

A gradual income tax cut is already on the books, but the chances of it taking effect anytime soon are slim.

In response to the 2002 fiscal crisis, lawmakers passed an elaborate tax bill that froze the income tax rate at 5.3 percent, repealed charitable deductions, and reduced personal exemptions in a bid to increase revenues, but they included stipulations to reverse those changes if certain economic conditions were met.

Last fall, after three years of steady economic improvement, the first of those hurdles was met, and as a result, personal exemptions will increase in the coming tax year by $275 for single filers and by $550 for those who are married and filing jointly. If the economy continues to improve, exemptions will continue to rise until finally, in fiscal 2010, the income tax rate would begin to reduce by 0.05 percent each year for six years until it is finally back at 5 percent. After that, if the economy continued to improve, the charitable deduction would be restored.

The Tisei-Tarr amendment, by comparison, would allow the Legislature and not the economy to dictate when and if the income tax rate would begin to be cut, based on state spending.

Michael Widmer -- head of the Massachusetts Taxpayers Foundation, a business-backed government watchdog group -- said the Tisei-Tarr amendment was a more prudent direction to take than Romney's approach of an immediate rate cut. Widmer said the state continues to rely on roughly $1 billion in one-time revenues to keep spending levels stable from year to year.

Geoffrey Beckwith -- executive director of the Massachusetts Municipal Association, which represents the state's cities and towns -- said the reasoning behind the Senate measure was flawed because municipalities are in dire financial straits.

''The main point is, in a rush to at least keep alive the idea of cutting the income tax at the state level, no one should lose sight of the fact that cities and towns are desperately hurting, and they will not recover if 2002 local aid numbers are set as the get-well point," Beckwith said. ''The costs of energy, health insurance, wages have all gone up since fiscal year 2002. Cities and towns have actually eliminated 14,200 municipal positions. . . . The state needs to reinvest in municipal government in a major way, rather than decreasing taxes."

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