House lawmakers last night gave approval to $392 million in tax increases for smokers and the state's largest corporations, providing Governor Deval Patrick with a major political victory while drawing fire from business leaders.
The legislators' 131-23 vote capped a long crusade by Patrick and his allies in the Legislature, who convinced House Speaker Salvatore F. DiMasi to back away from a more business-friendly plan and approve the state's most momentous tax increase since 2002.
It also ended two days of furious lobbying by banks and business groups and marked a legislative victory by the governor, who has been trying to improve his fortunes after the defeat of his plan to license resort casinos.
"We appreciate the House's willingness to move closer to the governor's proposal," said Doug Rubin, the governor's chief of staff. "When you look at where we started in this process, and the House and the Senate and the governor, for us to see that enacted is a good example of everybody working together."
After the House voted around 10:15 last night, DiMasi left without speaking to reporters but released a statement praising legislators for supporting a plan to help the state balance next year's budget.
"The members of the House have rolled up their sleeves, tackled difficult issues head-on, and provided common sense, fiscally responsible solutions to our budget challenges," he said.
The proposals would tighten corporate tax laws and prohibit several practices the governor called "loopholes," bringing in $217 million next year. It would also raise $175 million by increasing the state's cigarette tax by $1 per pack, to $2.51.
The cigarette increase would give Massachusetts the second-highest cigarette tax behind New Jersey, although New York legislators this week voted to trump both states with a $2.75-per-pack increase.
Proponents argued that the increase would fill state coffers and discourage residents from smoking, while critics said the state would lose money from smokers, who would travel to New Hampshire and Rhode Island to buy cheaper cigarettes.
The average price of a pack of cigarettes in Massachusetts would go up nearly 20 percent, to $6.41.
The Senate, which has been supportive of the tax increases, plans to take up the proposals within weeks. If there aren't significant differences, they could be signed by the governor shortly after.
The corporate tax changes, which would take effect Jan. 1, 2009, would prevent corporations from declaring some profits in states with more favorable tax rates.
Patrick had been seeking the changes since he took office, but his proposals had been repeatedly rebuffed by DiMasi, who said that the tax increases would send the wrong message to businesses.
DiMasi backed the plan this year, but maintained significant differences with Patrick over how deep corresponding reductions in corporate tax rates should be.
In exchange for tightening the state's corporate tax codes, Patrick had proposed gradually reducing the state's corporate tax rate from 9.5 percent to 8.3 percent by 2012. DiMasi went further, proposing a reduction to 7 percent by 2011.
The plan the House approved yesterday strikes a compromise by lowering taxes from 9.5 percent to 7.5 percent by 2012.
Massachusetts has the country's fourth-highest corporate tax rate, which business leaders argue has damaged the state's reputation and discouraged companies from locating here.
Administration officials estimate that up to 3,000 businesses - generally the larger ones - will pay more taxes under their plan, while at least 15,000 businesses would pay less.
After a flurry of lobbying by high-powered banks, the House also added a provision to reduce the tax rate for financial institutions, which under earlier proposals were exempt.
Their tax rates will be reduced from 10.5 percent to 9 percent by 2012.
"We're extremely pleased," said Kevin Kiley, chief operating officer of the Massachusetts Bankers Association, which represents 200 banks throughout the state, including
Facing uncertainty over vote counts, DiMasi had put off debate earlier this week to rejigger his game plan. The House had been expected to vote on the plan Tuesday, but business leaders and a cadre of Republicans criticized the plan, charging it would hurt businesses amid a looming recession.
Lobbyists and legislators yesterday roamed the hallways aimlessly for hours, as House leaders met behind close doors.
By late yesterday afternoon, it became clear that DiMasi's proposal did not have the votes . About 40 members of the Democratic caucus supported closing loopholes, but without any corresponding reduction in the corporate tax rate. Another 28 members were going to vote against DiMasi's plan because they thought it was too favorable to businesses.
Once debate began around 4 p.m., Republicans tried several legislative tactics to delay the vote, and launched into long speeches blasting the tax increase as harmful to businesses during a fragile economic time.
"A tax is a tax is a tax!" yelled Representative Jeffrey D. Perry, a Sandwich Republican. "This is taking money from our constituents, and harming our economy!"
The proposal comes at a time when the state has been struggling to find new sources of revenue to keep services and fund several ambitious spending programs. Cities and towns are also cutting services, and asking legislators for help.
And in a year when all legislators have to run for reelection, they are searching for ways to deliver for their communities.
The governor has proposed an additional $166 million in new revenues through additional taxes and increased enforcement of tax collections. Those proposals will come up in about two weeks as part of the House debate on the overall budget.
Matt Viser can be reached at email@example.com