State likely to freeze tax exemption

For the first time in four years, Massachusetts taxpayers will not receive a higher personal tax exemption in 2008 under current projections, a sign of a slowing economy that could force difficult decisions on Beacon Hill this spring.

Department of Revenue officials announced at a legislative hearing yesterday that a freeze in the personal income tax exemption was likely.

At the hearing, several economists predicted modest growth in state tax collections next year, because of stagnant corporate profits and capital gains.

An increase in the exemption, which is triggered the year after a rise in tax revenue of at least 2.5 percent after inflation, would have saved individuals $15 and couples $29 and cost the state about $60 million, according to an agency spokeswoman. Taxpayers have seen an increase in the exemption for the last three years. Couples can now deduct $7,700 and individuals can deduct $3,850.

"We're assuming it's not likely the exemption will kick in," said Revenue Department spokeswoman Jennifer Parent.

Also lagging are state lottery revenues, which officials confirmed are down 2 percent in the current fiscal year from last year. The lottery provides more than $900 million to cities and towns.

The economists appeared before a joint hearing of the Senate and House Committees on Ways and Means to help lawmakers arrive at a consensus on revenue estimates to be used in the next round of budget negotiations.

They offered varying predictions for revenue increases in the upcoming fiscal year, which begins July 1, ranging from a low of 1.8 percent from Department of Revenue tax analysts to 6.4 percent from the Beacon Hill Institute, a conservative think tank.

The most pessimistic analysts said the state is looking at a deficit of up to $1.5 billion, a gap that will make it difficult for the new governor to keep costly campaign promises, such as hiring 1,000 new police officers and expanding full-day kindergarten.

"I think it would be an achievement if this administration and this Legislature are able to achieve a balanced budget without gimmicks, without drawing on reserves and maintaining the present level of services," said Michael Widmer, president of the Massachusetts Taxpayers Foundation, which is predicting revenue growth next year of only 3 percent, compared to an estimated 4.2 percent this fiscal year and an actual 8.2 percent increase the previous year. Costs are expected to rise much more, he said.

But Governor Deval Patrick, Widmer said, will be hard-pressed to spend money on new programs or restore local aid to provide property tax relief for homeowners, a frequent campaign pledge. "The very best they can do would be to put a down payment on some initiatives -- take initial steps and phase them in over several years," he said.

After the hearing, Patrick's top budget aide, Administration and Finance Secretary Leslie Kirwan, said the governor's campaign pledge to cut $735 million annually from the budget in waste and inefficiencies would not be realized immediately.

"As the governor pointed out," she said, "he's looking at that over a longer period of time. We're just beginning that work with the agencies."

Patrick recently said he does not intend to complete new initiatives all in his first year. He said he will phase in the projects. But yesterday was the first time his administration has said it would not quickly cut $735 million from the budget.

The testimony before the budget committees was mostly gloomy, with economists describing an exodus of young people from the state, a depressed housing market and sales tax revenues that are the lowest per capita in the country.

The predictions of reduced revenue growth led lawmakers to raise the prospect of turning to new revenue sources, possibly legalized gambling or an increase in the gas tax. Raising income or sales taxes is unlikely, they said.

Senate Ways and Means chairwoman Therese Murray asked whether casinos could bring in enough revenue to restore fiscal balance. Widmer said legalized gambling would generate $300 million a year, not enough to close the expected budget gap.

Efforts to legalize gambling in the state have failed so far in the Legislature. During the campaign, Patrick said he was opposed to expanded gambling but has since said he's willing to listen to supporters. If Patrick decides to back a casino proposal, its chances would greatly improve, Widmer said after the hearing.

Kirwan said the state must make structural changes to balance "slow, steady growth in taxes" with the greater growth in fixed costs, such as healthcare and pensions.

She said she has identified ways to deal with the gap, but would not elaborate. She said Cabinet secretaries have been asked to find potential cost savings. "What we need to understand is that we need to look at a variety of approaches, and there's not going to be a magic bullet," she said.

In a speech to the Massachusetts Municipal Association Saturday, Patrick suggested that his budget would contain a modest local aid increase. He also talked about charging convicts a "safety fee" to help fund the hiring of new police officers.

One analyst said yesterday he doesn't believe that a funding crisis is inevitable. David Tuerck, executive director of the Beacon Hill Institute, said the state can balance the budget by making reasonable spending choices.

"It's as big or as small as the lawmakers want it to be it," he said, referring to the gap. "It's entirely under their control." Tuerck said his projections show a small deficit in 2007 and none in 2008.

He urged lawmakers to cut waste from "patronage-laden" agencies such as the MBTA and the Turnpike Authority before looking for new revenue. Practices such as paying Turnpike Authority toll collectors $60,000 a year "sour taxpayers on the need for additional revenues," he said.

After the hearing, House Ways and Means Committee chairman Robert A. DeLeo said that he now agrees that the deficit could reach the $1 billion level. He had earlier predicted a smaller amount.

Other legislators doubted the picture was really that bleak.

"I see a lot to be positive about; I'm relatively pleased," said Representative Lewis G. Evangelidis, Republican of Holden. "I'm not hearing doom and gloom, the sky is falling."