Dukakis tax cut could backfire on the governor in 1986 campaign

Kind words are reverberating around the Massachusetts State House regarding Governor Dukakis's fiscal 1986 budget and his proposed tax cut based on a projected fiscal '85 surplus. But today's prosperity might well raise expectations that could cloud the governor's political future. ``Progressive,'' ``compassionate,'' and ``responsible,'' -- those three not-so-little words of political rhetoric -- are echoing anew on Beacon Hill. That is how Gov. Michael S. Dukakis describes his proposed $8,685,787,027 fiscal 1986 state budget. But as accurate as the gubernatorial assessment may be, it is uncertain to what extent Massachusetts lawmakers share his views.

Seldom has a governor's financial blueprint for running the commonwealth made it through the legislature without major revisions if not a complete redrawing, and the current spending document, as carefully drawn as it was by the Dukakis administration's fiscal architects, may be no exception.

Particularly crucial for the Bay State's Democratic chief executive could be the fate of his proposal for using the now-expected $137 million revenue surplus in the current fiscal year, which ends June 30.

The Dukakis move for an income tax cut seems all but certain to fly through the legislature. The measure, involving increased exemptions tailored to benefit families and elderly couples most, might, however, not be the one-time break the governor is seeking but rather a permanent cut. Two other features of the Dukakis surplus disposition plan -- embracing creation of a state fiscal rainy-day fund of $20.5 million and allocation of an equal sum from the state general-fund surplus to the state's underfunded public employee pension reserve -- could have tougher sledding.

While the tax break proposed by the governor is at best modest, it would nevertheless be a step in the right direction, toward more significant reductions. Were more than $64 million of the anticipated $137 million fiscal 1985 revenue surplus allocated for this or any other type of tax break, it presumably would come at the expense of the proposed pension reserve or the Balanced Budget Stabilization Fund, as the governor has labeled the rainy-day reserve. Actually, a better name for the latter might be ``cloudy day'' fund, since the initial allocation of $20.5 million would keep the commonwealth solvent for but a few hours.

It might be noted that many of the 24 states that have established such fiscal emergency reserves provide an amount equal to, or at least approaching, 5 percent of their annual budget. For that kind of income-protection hedge Massachusetts would probably need some $450,000.

Similarly minuscule, by comparison with the need, is the proposed $20.5 million for the public employee pensions account, which is underfunded by close to $10 billion. Governor Dukakis has long since recognized that more pension fund reserves are needed. He has promised to introduce, later this year, a plan for eventually putting aside enough money to wipe out the whopping deficit in this fund.

The Dukakis concern for both a rainy-day fund to tide the state over during future economic hard times and the underfunded pension obligation, is underscored by his further proposal to split any surplus beyond the $137 million projected equally in those two directions. At this point not all of the projected surplus has been allocated, since no one can be exactly sure how much of a surplus there will be at the end of the fiscal year. And there is nothing to suggest that there will be a sizable surplus in the next fiscal year.

Most of the anticipated revenue growth next year would be absorbed by expansion of various programs. One is local aid, which would increase by $275.5 million to a record $2.7 billion in fiscal '86 under the Dukakis budget of nearly $8.7 billion filed Jan. 23.

Local aid makes up 31.1 percent of the total state budget, second only to the 38.2 percent ($3.3 billion) for human services such as public assistance, mental health, public health, social services, and corrections. The nearly $2 billion being sought for welfare of various types is a 4.8 percent increase in payments in benefits to the needy, including aid to families with dependent children and general relief.

The governor also is seeking $7 million more in programs for the homeless, $7 million more to provide child day care for low-income families, $10 million to treat neglected or abused children, and a 3 percent hike in benefits for state and municipal retirees.

Continuing his commitment to public-education reform across the state, the governor is proposing that $65 million be set aside for funding such efforts.

While the Dukakis budget can hardly qualify for an award in austerity, being some $773 million more than what has been approved for fiscal 1985, the increases in the human-services field certainly reflect a generous measure of compassion.

Certainly the governor, who clearly has every intention of seeking reelection next year, would have liked to recommend a larger tax break, if only to help Massachusetts citizens forget the two substantial tax boost packages he pushed through in his first gubernatorial term back in 1975. But to have gone further in tax cutting at this time might have bordered on fiscal irresponsibility, especially if the resulting potential revenue loss is to be made up from a budget surplus that may not be available another year.

Still, the governor was hardly unaware of the fact that whatever tax relief individual Bay State taxpayers receive next year will not be forgotten when they file their 1985 tax returns in April 1986.

Fully recognizing that once having made a tax cut it is awkward to cancel it, Dukakis obviously would like to continue the increased income tax exemption for more than one year. But he is not about to either make or accept such a commitment. Republican legislative leaders, however, are determined to press for a permanent tax cut, something many Democratic lawmakers might find too tempting to overlook. The governor thus could find himself with the choice of vetoing such a measure or reluctantly accepting it.