By Hilary Russ

TRENTON, New Jersey (Reuters) - The New Jersey Senate budget committee approved on Thursday a $31.7 billion budget for fiscal year 2013 that pegs a tax cut to an improvement in the state's revenue collections.

"I believe as New Jersey's economy continues to grow ... we should return money to the taxpayers," state Senator Paul Sarlo, chair of the budget committee, said during the hearing.

Over the past couple of weeks, the Democratic-led legislature has been negotiating with Republicans over the budget and possible tax cuts.

In February, Republican Governor Chris Christie proposed a 10 percent across-the-board income tax cut to be phased in over the next three years.

State Senate President Stephen Sweeney called instead for New Jersey families earning less than $250,000 to receive a 10 percent income-tax credit on their property taxes over four years.

The budget legislation advanced on Thursday includes Sweeney's tax cut plan - with the provision that the $183 million that would be needed for the tax cut in fiscal 2013 would be set aside until revenue collections improve. Lawmakers did not specify the amount of revenue improvement they sought, but a spokesman for Senate Democrats said 6 or 7 percent growth in revenue collections was targeted.

Christie said in a statement the Democrats' budget proposal was "sending a loud, resounding no to tax relief." A spokesman could not immediately be reached to say whether Christie would veto the legislation.

Republican senators said they would not support the budget proposal because it in effect put off a tax cut that they say has been sorely needed for years.

The state Assembly's budget committee is expected to approve the legislation on Friday, although it could make changes. The bill would go to a full Senate vote on Monday, when senators could make amendments from the floor of the chamber. Continued...