Last modified: Monday, October 13, 2008 2:33 AM EDT Local aid a taxing issue BY NAOKO YOSHIDA FOR THE SUN CHRONICLE BOSTON - Proponents say Question 1, a ballot initiative that would end the state's income tax, would return money to the people and end waste and abuse in state and local government. The state and local leaders say Question 1 would hurt those most likely to vote for the referendum. "It's a big tax break for the wealthy, and the ones who in the end are going to pay more, not less, are lower- and middle-income people," said Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation. "People who are going to be tempted to vote for this are in the end going to be losers." The Committee for Small Government, led by Libertarian activist Carla Howell, has been campaigning for the initiative that would to cut an estimated $12.5 billion, or about 40 percent, of the state's $28.2 billion budget for fiscal year 2008. With state government scrambling to deal with a budget deficit, the elimination of income tax revenue would be devastating, opponents say. "I don't see how the government, schools, our public safety establishment, higher education system, nursing homes, the whole health care system can function by taking $12 billon out of the budget," said Sen. James Timilty, D-Walpole. The predicted impact of the referendum has many local officials holding their breath. Local communities rely on state aid to balance their budgets. According to a Massachusetts Taxpayer's Foundation study, 35 percent of Attleboro's revenue in the 2008 fiscal year came from state aid. The city received about $7.7 million from the state as general government aid. The taxpayer foundation report said that eliminating the income tax would have cut that amount to about $2.2 million. But Howell contends the people would be the winners. "There's a lot of people interested in having that $12 billion back in the hands of men and women who earned it," she said. The initiative, if passed, would give an average of $3,700 back to taxpayers. Widmer said those numbers are false and misleading. Howell says that, including various federal grants and subsidies, the entire state budget is $47 billion. "She's wrong there," Widmer said. "In the $47 billion, for example, it includes $3.5 billion that comes through the Lottery, but that will be given away as prizes. She's using the inflated number, and it's inaccurate." The taxpayer foundation commissioned a study that used $32 billion - instead of the widely cited $28 billion - as the total amount of the state budget, including some off-budget items, such as the pension for the state retirees. The report showed there are five major spending criteria that the state is legally required to pay, including Medicaid, aid to local schools, the MBTA, pensions and debt service. All told, the obligations come to $12.5 billion. Subtracting the required spending and another $12 billion of income tax revenue from the state budget, the balance would be 29 percent of the last year's balance. Widmer predicted property taxes and probably sales taxes would have to be increased. "One of the ironies is that a lot of low- and middle-income people in your area are going to end up paying higher taxes because there is going to have to be some additional revenues," he said. "We can't close 70 percent of prisons, 70 percent of courts and 70 percent of human services and 70 percent of higher education." Barbara Anderson, executive director of Citizens for Limited Taxation, claimed that the report is not an objective analysis. "If you already know what you are using it for, then that kind of takes away a little bit of the objectivity from the report," she said. She also said the taxpayers' foundation has no way of knowing about property tax. "It's no secret that we're joining with three other groups to commission the study on the economic impact because we are so concerned about it," said Widmer. "Our facts are accurate, and people listen to us." Citizens for Limited Taxation had a ballot question in 2000 to roll the income tax rate back to 5 percent from 5.75 percent. Voters passed the initiative to phase down the income tax rate over three years. However, the Legislature froze the rate at 5.3 percent in 2002. It remains at that level. "We feel that the Legislature must have respect for the voters. So we figure that if they won't give us 5 percent, then let's try zero," Anderson said. Only seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income. "Lower income people are most highly dependent on services of the state government, but they are getting smaller tax breaks and probably end up paying higher taxes and lose the services," Widmer said. Anderson said local aid is part of waste. "The property tax limit that we created encouraged the state giving local aid, which is a good thing. We always supported the local aid. But through the '90s there was so much of it, and the cities and towns started giving it away to the public employees' unions in outrageous benefits." Anderson's organization supports the initiative for different reasons: "Part of it is an angry response, which is where is our 5 percent? The other part is a more idealistic response, which is why can't be like New Hampshire?" she said. However, Anderson said she thinks Howell's argument for removing the individual tax burden remains a significant factor. "People are looking at their own fuel bills and their pensions dropping and they are looking at what public unions are getting - retirement, huge pensions and health insurance for life," she said. "So, I do think that aspect is more important now than when this campaign has started."