A proposed $207 million tax cut could be detrimental to the credit rating for the state of Massachusetts, rating officials said yesterday.
"Any sort of tax cut will have to be covered by either a strong display of revenues or an uptick in the state's economy," said Claire G. Cohen, executive vice president at Fitch Investors Service Inc. "It's hard to say too much about a proposal, though."
Earlier this week, Massachusetts Gov. William F. Weld proposed the tax cut to offset the tax increases approved by Congress as part of President Bill Clinton's $496 billion deficit reduction package.
"The tax cuts filed today are intended to keep the Clinton taxes from derailing our economic momentum here in Massachusetts," Weld said at a press conference on Wednesday night. "Our economic prosperity could be sucked dry."
The Republican governor said his plan:
* Reduces the personal state income tax to 5.85% from 5.95%.
* Cuts the state gasoline tax by 4.3 cents per gallon.
* Raises the no-tax status on families to $13,500 of annual earnings from the current level of $12,000.
* Increases the amount of tax-free interest senior citizens can earn.
Weld did not specify where the money would come from to keep the state's $15.5 billion fiscal 1994 budget balanced. But he did say the cuts would not come from local or school aid, higher education, or highway repair.
Weld hopes the measure will come before the legislature this fall, according to aides.
"The governor had said he would answer any tax increases by the federal government," said Ann Murphy, spokeswoman for the governor. "The governor feels this move makes good economic sense."
Yesterday, state Treasurer Joseph D. Malone said Massachusetts will sell more than $500 million of refunding bonds next week, which will promote a quick review from the agencies.
"This is the kind of announcement that will cause us to look a lot harder at the underlying strength of an issuer," said a ratings official speaking on the condition of anonymity.
Although most ratings officials said the tax cuts appears to represent only a small part of the state's entire budget, it could be enough to drive a wedge between the executive and legislative branches of Massachusetts state government.
The ratings official said, "With the state's supplemental and education spending for the current year not yet complete, it's difficult to say if the state's revenues could support a cut."
Richard Larkin, a managing director at Standard & Poor's Corp., agreed. "I think that if this cut can be financed without any sort of gimmickry, it shouldn't be too disastrous," he said. "It could start a small rift between the branches, but it also could create a valid discussion on taxes between the branches."
Much of the reason for the state's upgrade last September was credited to a renewed effort by the two branches of state government to work together. Last September, Moody's upgraded the state to single-A from Baa, and Standard & Poor's upgraded to single-A from BBB. Toward the end of Gov. Michael S. Dukaki's term, a stalemate between the two branches of government contributed to the state's rating decline, to Baa from Moody's Investors Service and to BBB from Standard & Poor's. Fitch left the state's rating at A.