Repeal of surtax -- laying nickname of `Taxachusetts' to rest. Still needed: reform of tax system. Is state moving toward a `grad tax'?

MASSACHUSETTS has had its share of nicknames over the years. But none is less cherished than that of Taxachusetts. It's a label that makes Beacon Hill lawmakers see red, and something they would like to lay to rest.

The recently approved, two-step phase-out of the decade-old 7.5 percent surcharge on personal income taxes is an attempt in that direction. While its benefits may be less substantial than some taxpayers have been led to expect, from a political standpoint anything that lessens government's bite on people's wallets helps.

The state can certainly survive without the $331 million in annual revenue that it will lose when the surcharge repeal becomes fully effective in 1987.

But still needed is a complete overhaul of state and municipal tax structure.

This is something a special legislative commission is working on, as have similar panels in the past. Hopefully a year from now the fiscal blueprint will be complete.

Whether panel recommendations embrace replacing the state's present flat-rate personal income tax with graduated rates will likely hinge on an expected court challenge of a new system of personal exemptions that is provided in the new law, along with the surcharge repeal.

Allowing those who earn the least to have the biggest exemptions and those in the highest income brackets the smallest, is a type of graduated tax structure, or so it would appear. And imposition of a ``grad tax'' is barred by the Massachusetts constitution.

Critics of the ``vanishing exemption'' system, like Barbara Anderson, the executive director of Citizens for Limited Taxation (CLT), view it as a backdoor approach to the ``grad tax.'' They note that attempts to amend the constitution to permit graduated tax rates, keyed to personal income levels, were rejected by voters across the commonwealth four times in the past quarter century.

Boosters of the ``vanishing exemption'' say it is not another form of graduated tax. On their side is a 4-to-3 advisory opinion in 1982 from the Massachusetts Supreme Judicial Court, which upheld the concept. But that ruling made it clear that if the intent of the exemption structure was to provide what amounts to a graduated tax, then it would be unconstitutional.

There can be little doubt that the purpose of the ``vanishing exemption'' -- indeed its appeal to rank-and-file lawmakers, particularly those from low-income areas -- is to give a bigger break to those who have less.

Single people with incomes of less than $6,000 and couples with incomes of less than $10,000 will be tax exempt. Previously, individuals making less than $5,000 and couples making less than $8,300 were exempt.

Under the new setup, low-income taxpayers would qualify for an personal exemption of up to $3,800, and couples up to $8,000. These would drop to a low of $600 for single taxpayers earning $40,000 or more, and $1,200 for couples with joint incomes of $80,000 or more. Currently, single taxpayers, regardless of what they earn, are allowed a $2,200 exemption and couples, $3,200.

Since, with repeal of the surcharge, those who have the most income stand to benefit most, and those who earn the least stand to gain the least, the ``vanishing exemption'' device was added to help even things out a bit.

But as well motivated as any such arrangement may be, it is at best awkward and may violate the state constitution. A less-clouded and more straightforward approach would be through a system of graduated tax rates, similar to the federal government and most of the other 43 states that tax personal income.

Although state legislators might prefer a ``grad tax,'' the necessary change in the constitution could not be made until 1988. It would require approval by a majority of senators and representatives in 1986, and similar support in 1987 or '88, to reach the ballot where voters would have the final say.

Such proposals were soundly rejected in 1962, '68, '72, and '76. It is uncertain to what extent public sentiment about the ``grad tax'' may have changed in the nine years since the last try was thwarted, by better than 2 to 1.

While Bay State lawmakers are patting themselves on the back for having repealed the surcharge, at least some of the credit belongs to others. The more than 137,000 voters who signed the CLT initiative petition to end the tax-on-a-tax surely provided a push.

Gov. Michael S. Dukakis, criticized in the 1982 campaign for his role in putting the surcharge on the books in 1975, had little choice but to support repeal. It would have happened anyhow. It also seems to remove a potentially nagging issue from the coming governor's race, in which he will be standing for reelection.