Tax cut campaign proposals under fire

With three of the candidates for governor calling for a rollback of the state income tax, some budget specialists warn that Massachusetts cannot afford to lose the revenue and also question whether the candidates' numbers add up.

Cutting the state income tax rate immediately from 5.3 to 5 percent -- as proposed by Lieutenant Governor Kerry Healey, a Republican, and Attorney General Thomas F. Reilly, a Democrat -- would take $675 million a year from the state budget and deliver it to taxpayers, who voted for the cut in 2000.

But leading budget specialists warn that there would be little money left in the state budget to increase spending in for local aid to struggling municipalities.

``We don't have the revenues for a tax cut without drawing on reserves or cutting other programs or both," said Michael Widmer, executive director of the business-funded Massachusetts Taxpayers Foundation. ``We need to be cautious about building in either tax cuts or spending increases we can't support. It is utter folly to be balancing budgets using reserves. It sets up the state potentially for a fall."

Noah Berger, executive director of the Massachusetts Budget and Policy Center, a liberal think tank, also said that only after the state budget is balanced should any new governor consider a tax cut.

``Any new revenue growth should go first toward balancing the budget without using rainy day funds," he said. ``After that there are choices -- whether you want to restore local aid, funding for education, or whether your top priority is new tax cuts."

Of the other Democrats, Christopher F. Gabrieli wants to cut the state income tax gradually by diverting a portion of state tax revenue when the economy is growing. Democrat Deval L. Patrick opposes an income tax rollback, saying it would force cities and towns to increase property taxes to make up for the lost revenue.

Taxes dominated the three-way Democratic race for governor last week, as the candidates positioned themselves on a potent political issue. Voters in 2000 called for the income tax to be lowered from 5.85 percent to 5 percent over three years, but the Legislature has left it at 5.3 percent, first citing the fiscal crisis that began in 2002 and then the continued demands for state spending.

A Boston Globe poll published Aug. 27 found that 57 percent of likely Democratic voters surveyed supported the rollback to 5 percent. The figure among Republicans is undoubtedly higher. Strategists for Healey were pleased last week when the Democrats -- who generally are thought to be weaker on fiscal issues than Republicans -- began talking about tax cuts.

``Clearly, our opponents have shown that taxes are the top issue in this race," said Tim O'Brien, Healey's campaign manager. ``We welcome the debate because Lieutenant Governor Healey is the only candidate the voters can trust to actually push for the rollback."

Reilly, who opposed the tax rollback until last year, has been telling audiences that the rollback would cost $264 million. That figure is an estimate of what it would cost if it went into effect in January, halfway through the fiscal year.

According to state revenue officials, the rollback would trigger a second tax break that would make taxpayers happy, but drain more money from the budget. Under state law, a rollback also would resume after one year, a charitable tax deduction eliminated in 2002. Restoring the charitable tax deduction, state revenue officials said, would cost the Commonwealth millions in lost revenue -- as much as $243 million a year by 2010.

Widmer, asked by the Globe to assess the candidates' tax plans last week, criticized Reilly's approach because he said it appears to depend on balancing the state budget by using reserves -- money that is supposed to be used only in emergencies. State officials are relying on $550 million in reserves to balance this year's budget.

Widmer took particular issue with Reilly's assertion, repeated often on the campaign trail, that as governor he would have an extra $500 million in revenue to spend -- even after a tax cut. If there were additional revenue, it should be used to reduce the state's use of reserves, Widmer argued.

Reilly's campaign, asked to respond to the critique, insisted the state can afford a tax cut.

``The $250 million needed to fund the first year of the income tax cut is about 1 percent of the state budget," said Reilly's spokesman, Corey Welford. ``Do our opponents think they cannot find 1 percent of waste and inefficiency in the $26 billion state budget to give people the tax relief they voted for?"

Widmer gave Gabrieli's proposed tax rollback a better review. Gabrieli calls for a gradual rollback of the tax rate if tax revenues increase substantially -- more than the rate of inflation. Under his plan, Gabrieli would apply 40 percent of the revenue above inflation to a tax cut.

``It's a very sensible concept," said Widmer, who is not backing any candidate . ``It provides a hedge against a recession so that if tax revenues did not rise at the rate of inflation, there would be no tax cut."

As for Healey's plan, O'Brien said Healey plans to pare down the budget to offset a tax cut. She hasn't provided a detailed list of potential cuts, but said she will, among other things, seek to eliminate 104 local pension boards, for a savings of $200 million a year.

`` Lieutenant Governor Healey will take the money off the table and set a responsible budget after we give the taxpayers back the money they voted for," O'Brien said.

The discussion of tax cuts sets up a familiar political dynamic, allowing Republicans to boast their candidate should be elected governor to balance the Democratic legislature. Governor Mitt Romney has called for a rollback repeatedly, but the Legislature refused.

In May, the State Senate voted to lower the tax rate from 5.3 percent to 5 percent if state spending on education and local aid were restored to levels last seen before the fiscal crisis of 2002. It was part of a package of tax cuts.

``This action dispels the notion the Democrats are averse to tax cuts," Senate President Robert E. Travaglini told the Globe at the time. The House did not go along with the rollback.

Last week, House minority leader Bradley Jones, a Republican from North Reading, complained Reilly has not described what spending he would cut to offset the tax cut and that Gabrieli's plan may never become reality.

``None of them talk about places where we can cut," said Jones. ``Show us the cuts. For better or worse, you can point to Kerry Healey and Governor Romney and say they've done vetoes where they thought money shouldn't be spent or money was overspent."

Gabrieli's plan ``sounds really appealing," but he said it is unclear whether the tax cut would ever kick in because under state law, much of any increase in tax revenues must go to fund public transportation and schools.

``I think it's a victory that this is the issue we're talking about," said Jones. ``But I'm hard-pressed to believe voters will buy into the idea that the Democratic Party is the one that will watch out for their tax dollars."

Stephen P. Crosby , dean of the McCormack Graduate School of Policy Studies at the University of Massachusetts at Boston, said the details of the candidates' tax plans are less important than the philosophy they reflect.

``Looking past the numbers, their positions say a lot about the candidates' belief in the role of government, and to a modest extent the role of tax policy to redistribute income. You have Reilly and Healey taking the conservative position -- that the government should be able to make do on 5 percent," said Crosby, secretary of administration and finance under Paul Cellucci, a former Republican governor.

Patrick believes taxes represent ``small money for a lot of public good," while Gabrieli is offering himself as a more centrist, ``roll-up-your-sleeves, don't take a philosophic position" alternative to Reilly and Patrick, Crosby observed.

``You can get hung up debating the arithmetic, but it's not really about arithmetic," he said.

Some specialists said that whatever the impact, the next governor should roll back the tax rate because the voters approved it.

``The voters have said they wanted it, not only if there is no economic downturn," said David Tuerck, executive director at Beacon Hill Institute, a free market think tank at Suffolk University.

Andrea Estes can be reached at estes@globe.com.