Romney seeks $225m in tax cuts

Governor Mitt Romney called yesterday for a $225 million tax cut in the coming fiscal year, pointing to a resurgent economy that is sparking an "extraordinary growth in revenues" after four years of fiscal crisis.

The governor wants to cut the state income tax rate from 5.3 percent to 5 percent, which translates into an average of $100 per taxpayer the first year. Romney would also use some of the extra money to increase spending on substance-abuse programs and homeland security, boost Medicaid reimbursement rates to hospitals and other health care providers, and replenish the state's depleted rainy day reserves. The governor did not specify how much he would spend in those areas.

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 the current 5.3 percent. Now that the state's economy is rumbling to life, Romney said, it is time to follow through with the full tax cut.

"It's time to carry out the will of the voters by lowering our tax rate to 5 percent. Let's get this underway," Romney said at a State House news conference he called to unveil a new report on capital punishment. "That helps the taxpayers, it follows their voice at the ballot box, and it further stimulates our economy."

It was the second election-year tax cut proposed by Romney in the last two weeks: the governor suggested a cut in the capital gains rate last month -- to answer a court ruling -- but he backed down after the Legislature came up with a revenue-neutral compromise. Yesterday, Democratic legislative leaders reacted coldly to Romney's proposed income tax cut, saying it was premature to proclaim the end of the state's fiscal crisis and unwise to cut taxes at the expense of being more aggressive in restoring some of the $3 billion in budget cuts over the past three years.

Senator Therese Murray, chairwoman of the Senate Ways and Means Committee, warned that the Supreme Judicial Court may order the state to increase spending on schools by $1 billion or more as a result of a lawsuit filed by students in poor districts.

"To say, 'Let's spend this money and give tax cuts,' when just about every single city and town is hurting, I don't think is a smart thing to do right now," said Murray, Democrat of Plymouth. "We could be anywhere from $1.5 billion to $3 billion in the hole because of that court case. Why would you get yourself in a deeper hole and hot water now, when that's looming in front of us?"

Lowering the income 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. Tax increases must take effect at the beginning of the calendar year on Jan. 1, while the fiscal year begins July 1.

Romney's optimism is based largely on a substantial spike in the amount of money Massachusetts collected last month from income withholding, which makes up most of the state's revenue and is considered a key barometer of overall economic health because it is tied so closely to job creation. The state took in $599 million in income withholding last month, up $84 million, or 16.3 percent, from April 2003. Overall, it received $1.8 billion in revenue, up $410 million, or 29 percent, compared with last April.

Since the beginning of the year, the state has collected $517 million more than what administration and legislative budget writers forecast for fiscal 2004, meaning it is likely to carry at least that much into the next fiscal year. Although revenue has been rising fairly steadily for months, state officials had always cautioned that income withholding was stagnant. That changed yesterday.

"Something's happening out there. I can't tell you how many jobs that represents, but we're clearly going in the right direction and the trend seems to be consistent," said Revenue Commissioner Alan LeBovidge. "This is a big jump."

But Michael J. Widmer of the Massachusetts Taxpayers Foundation, a business-funded nonprofit agency that monitors taxes and government spending, said the state is "far from out of the woods." Widmer said the state still has a so-called structural deficit, or a gap between recurring revenues and its yearly spending obligations, of at least $1 billion. Revenue may be rising, he said, but it is not enough to keep up with rising costs that are largely unavoidable, such as health care, pensions, and debt service.

"There's no indication that we can afford a tax cut and work our way out of the structural deficit and meet our legal and moral obligations," Widmer said.

Critics said that many cities and towns have cut payrolls and raised property taxes to compensate for cuts in state aid. If there is new money to spend, they say, it should be used to beef up spending on schools, public works, and police and fire protection.

"We feel strongly that the Commonwealth should take a look at the investments that need to be made before running down a tax-cut path," said Geoff Beckwith of the Massachusetts Municipal Association, a nonprofit organization that represents cities and towns on Beacon Hill.

John McDonough of Health Care for All said that "before cutting taxes, the state needs to meet its obligations to its needy citizens." McDonough said the state has already committed -- in writing -- to spending $15 million to restore health care to 10,000 legal immigrants, and it should fulfill that commitment before cutting any taxes.

Barbara Anderson of Citizens for Limited Taxation praised Romney for keeping his campaign promise to push for the lower tax rate.

"The typical Beacon Hill response is, 'Oh, we can't afford it, the voters didn't know what they were doing, and we want the money.' The unusual Beacon Hill response is a politician keeping his word and respecting the voters," Anderson said. "Now that the revenues are building again, if we don't do it, then they'll spend us into another fiscal crisis."

Romney said that lowering taxes stimulates the economy. Tax cuts put Massachusetts in a better position to compete with other states for businesses and workers, he said, and a thriving economy could fill the state's coffers.