During the campaign for the governorship in 2002, Romney proposed a plan that he said would balance the Massachusetts budget without raising taxes.
However, he refused to sign a pledge from the Massachusetts-based Citizens for Limited Taxation to not raise taxes, saying that he was against tax increases in general but did not intend to make a commitment that would prevent him from considering all options necessary to address the revenue needs of the state.
(On December 31, 2006, with his term about to end, he did sign a similar anti-tax pledge put forth by Grover Norquist
's Americans for Tax Reform
, as part of his soon-to-start presidential campaign.
Upon entering office, Romney faced an immediate budget shortfall for the current fiscal year and a deficit for the following year initially projected to be $3 billion, although outside analysts and the state Department of Revenue said that that projection was too high, as it was based on faulty revenue predictions.
(Massachusetts' fiscal year
begins July 1 of the preceding calendar year.) To close the deficits, he asked for, and was granted by the state legislature, emergency powers (under the existing Section "9C" authority in state law) to make cuts in the fiscal year 2003 budget. Romney cut spending and restructured state government.
Romney, in concert with the legislature, doubled fees for court filings, professional regulations, marriage licenses and firearm licenses, increased fees for many other state licenses and services as well as creating new fees. In all 33 new fees were created and 57 fees were increased, including some that had not been adjusted in over a decade. Some of these were service fees, such as charging businesses more to put up signs. Opponents said the reliance on fees imposed a hardship on those who could least afford them.
The state of Massachusetts thereby raised $501 million in new income in Romneys' first year, more than any other state in the nation (New York was second with $367 million). Nine other states raised fees and fines by more than $100 million.
He also increased a state gasoline fee originally intended for cleanup of contamination around underground fuel storage tanks.
This two cents per gallon increase made for a total effective state gasoline tax of 23.5 cents per gallon, generating about $60 million per year in additional revenue and surpluses of $40 million over the costs of the cleanup program.
Romney also implemented a "New Market Tax Credit"
and extended the "Investment Tax Credit" during 2003.
The additional revenue from a capital gains tax increase that had been enacted prior to Romney's taking office reduced the projected deficit by $1.3 billion. Romney approved $128 million in tax changes and raised another $181 million in additional business taxes in the next two years; businesses called these changes tax increases, but Romney defended them as the elimination of "loopholes".
Specific changes and 'loophole' closures included preventing corporations from assigning income from "intangible" assets such as trademarks to low-tax states, preventing some corporations from avoiding taxes through paper restructurings, requiring businesses that only traded securities to pay the same tax rates as of other businesses, applying sales taxes to goods bought and modified out of state before being brought in-state, eliminating a tax break of the printing of huge store catalogs, and taxing sales of software downloaded over the internet (which had previously gone untaxed) the same as software purchased on CDs bought in brick-and-mortar
Over his full term, over $300 million of such loopholes were closed.
The loophole actions, fueled by Romney's sense of rectitude in the face of conservative and corporate critics, initially won plaudits from legislators as an example of political courage, before Romney backed away from further closings towards the end of his term.
The state also cut spending by $1.6 billion, including $700 million in reductions in state aid to cities and towns.
In response, cities and towns became more reliant on local revenue to pay for municipal services and schools. This had the effect of causing property taxes to rise by five percent, their highest level in 25 years in Massachusetts.
In 2005, Romney signed legislation allowing local commercial property taxes to be raised, which resulted in $100 million more in property taxes from local business owners.
Romney stated that Massachusetts finished fiscal 2004 with a $700 million surplus.
Official state figures said that fiscal 2005 finished with a $594.4 million surplus.
For fiscal 2006, the surplus was $720.9 million according to official figures.
The state's "rainy day fund
", more formally known as the Stabilization Fund, was replenished through government consolidation and reform. At the close of fiscal year 2006, the fund enjoyed a $2.155 billion balance.
Romney would declare, "We have successfully closed the largest deficit in our state's history without raising taxes,"
although others disputed the claim on the grounds that usage fees had gone up.
As the state's fiscal outlook improved, Romney repeatedly, and unsuccessfully, urged the legislature to reduce the state income tax from a flat rate
of 5.3 percent to 5.0 percent.
(In 2000, voters had approved a gradual reduction in the income tax from 5.85 to 5.0 percent; but as an emergency measure in response to the fiscal crisis, the legislature had halted the rollback at 5.3 percent in 2002.
) He also proposed a "tax-free shopping day",
a property tax relief for Seniors,
and a manufacturing tax credit.
In 2006, the Massachusetts legislature approved a budget for fiscal year 2007 that required spending $450 million from the rainy day fund. Even though the state had collected a record-breaking amount of tax revenue in the fiscal year,
the funds were needed to cover the increased spending. Romney vetoed the transfer of funds from the contingency account. The veto was overturned by the legislature, and indeed for the 2006 budget, all 250 line-item vetoes were overturned, and for the entire year of 2006, all of Romney's vetoes of legislative bills were subsequently overturned by the Massachusetts Legislature.
In November 2006, Romney then used his emergency budget-revision authority to cut the $450 million from the budget, saying: "One of the primary responsibilities of government is keeping the books balanced. The problem here is not revenues; the problem is overspending. The level of spending which we're looking at would put us on the same road to financial crisis and ruin that our commonwealth has been down before."
Later, he restored some of that amount.
Upon leaving office in January 2007 (the middle of fiscal year 2007), Romney argued that he had left the state with a large budget surplus, after he cut hundreds of millions of dollars of programs. However, upon taking office, successor Governor Deval Patrick
said there would be a $1 billion deficit for fiscal 2008 if existing service levels were carried over into the next year's budget.
At the same time, Patrick restored $384 million in the emergency budgetary authority spending cuts for fiscal 2007 that Romney had made.
The budget for fiscal 2008 that Patrick submitted in February 2007 included $515 million in spending cuts and $295 million in new corporate taxes.
As it happened, fiscal 2007 ended with a $307.1 million deficit and fiscal 2008 ended with a $495.2 million deficit.
The combined state and local tax burden in Massachusetts increased during Romney's governorship.
According to an analysis by the Tax Foundation
, from 2002 to 2006 the average rate of state and local taxes in Massachusetts rose from 9.6 percent to 10.2 percent (compared to the national rate, which rose from 9.5 percent to 9.7 percent).