Budget report to cite gap of $750m

A prominent watchdog group will issue a report next week arguing that the state faces a long-term budget gap of at least $750 million, undercutting Governor Mitt Romney's campaign-season push for a $225 million cut in the income tax.

The Massachusetts Taxpayers Foundation, a business-funded nonprofit that studies taxes and government spending, plans to release a report Tuesday detailing the so-called "structural deficit," or the gap between recurring revenue and ongoing expenditures.

"It's clearly the wrong time for a major tax cut or large spending increases; you can't have either without identifying areas you'll have to cut," said Michael J. Widmer, who heads the foundation. "There's still a large mismatch between ongoing revenues and ongoing spending."

The state budget for fiscal 2005, which began July 1, is balanced, but only because the state is using "one-time revenue," or money that doesn't flow into its coffers every year, to pay for all the spending. The extra dollars are coming from the state's reserves, the federal government, and other sources.

The fast-growing Medicaid program, debt service, and the state's relaunched school construction program are among Beacon Hill's most expensive obligations, Widmer said. He added that his group's calculation assumes that the state will collect more in taxes in fiscal 2005 than it is currently projecting.

Widmer's view echoes that of leading Democrats, who also say that Romney's tax cut would be unwise as the state slowly regains its footing after a harrowing fiscal crisis. Democrats also point out that the Supreme Judicial Court may order the state to pour millions more into public education as a result of a lawsuit filed by poor districts. Shortly before he left Beacon Hill, former House speaker Thomas M. Finneran criticized Romney for proposing what he called an orgy of tax cuts at such an uncertain economic time.

But Republicans point to recent revenue figures, which show that the state has collected about $100 million more than it projected through the first quarter of fiscal 2005, as evidence that the time has come to reduce the burden on taxpayers. The state finished fiscal 2004 with $724 million more than it expected, though lawmakers spent more than half of that money in a supplemental budget.

The governor has proposed reducing the state income tax rate to 5 percent, a decrease of about $100 for the average taxpayer. In 2000, voters approved a gradual lowering of the income tax rate, which was 5.85 percent at the time, to 5 percent. But in the depths of the state's fiscal crisis in 2002, the Legislature froze the rate at 5.3 percent. Now that the state's economy is rumbling back to life, Romney said, it's time to follow through with the full tax cut.

Lowering the tax rate to 5 percent would cost the state between $200 million and $225 million in fiscal 2005. But it would reduce revenue by twice that amount in fiscal 2006, when it would be in effect for the entire year.

"Even though Halloween is three weeks away, the Democrats are trying to scare people into believing we can't afford a tax cut; the facts prove them wrong," Lieutenant Governor Kerry Healey said this week at a press conference featuring about a dozen GOP candidates. "They will use every excuse in the book to stop change and to deny the people of Massachusetts the tax cut they voted for in overwhelming numbers."

David G. Tuerck, executive director of the conservative Beacon Hill Institute at Suffolk University, said the structural deficit is a political concept, not an economic one.

"The whole idea of a structural deficit assumes that savings on the spending side of the equation are off the table," Tuerck said. "But when the Massachusetts Taxpayers Foundation and others talk about this structural deficit, they are assuming fixed growth in state spending. There's no need to assume that at all. There are plenty of ways the state could trim expenditures, if it has the political will to do so."