A Fever for Tax Cuts

By GEORGE J. CHURCH

Ah, the blessings of a growing economy! Especially if you happen to be a Governor or a state legislator. It makes it possible to forget all that fiscal-stringency stuff that caused so much trouble the past few years and start cutting taxes again -- just in time for this year's state elections too.

But wait. Left to itself, some of President Clinton's advisers worry, the economy may not keep growing this strongly, or at all, for the next two years. What might guarantee that it will? A federal tax cut, of course, enacted in plenty of time to win the gratitude of voters before the 1996 presidential election.

Which proves once more that for politicians from statehouse to White House, thinking about the next election is virtually synonymous with thinking about tax cuts -- as long as the state of the economy provides any plausible excuse for doing so. To candidate Clinton that seemed to be the case in 1992, but he abandoned his pledge of a tax cut for the middle class as soon as he moved into the Oval Office. Cutting a menacing budget deficit took precedence. Now, however, some of his advisers are pushing to revive the idea next spring.

The primary motive is political. Clinton knows Republicans are already stockpiling videotapes of him making promises that he later broke, and the middle-class tax cut is a major one. Moreover, on Sept. 27, G.O.P. House members and candidates will hold an extravaganza at the West Front of the Capitol to promote a unified platform for their campaigns. Tax cuts will be * prominently featured; Representative John Kasich of Ohio is pushing a tax credit of $500 for each child in a family, every year. Says he: "Obviously the White House is going to try to steal it."

Maybe, maybe not. Those Clinton political counselors promoting a tax cut contend that it may be needed to stimulate consumer buying and keep retail sales and production growing. But the President's economic advisers, by contrast, think business needs no such stimulus. They fear that the loss of revenues from a tax cut not offset by budget cuts or revenue increases elsewhere might cause the deficit to start growing again, forcing up interest rates and harming rather than helping business. Clinton has yet to make up his mind.

Tax cuts at the state level have more economic justification. The quickening expansion is pouring money into state coffers; overall tax collections are running 6% ahead of the past fiscal year. Sales-tax receipts are especially strong; for all 50 states they rose 8% in the second quarter over the 1993 period, and 18 states had double-digit increases. In some states, the growth of spending has slowed, thanks to brutal cuts enacted, along with heavy tax increases, to keep budgets balanced during and immediately after the 1990-91 recession (48 states are required by law to balance their budgets every year).

Now the states are in a position to give some money back to their taxpayers. The Center for the Study of the States at the Nelson A. Rockefeller Institute of Government in Albany, New York, counts 20 states that have cut taxes this year, vs. 10 that have raised them. Institute director Steven Gold calculates that the net cut for all 50 states amounts to $1.7 billion a year.

New York cut its taxes to the lowest level in 30 years, with reductions totaling $470 million, although businesses benefited more than individuals. Arizona, which raised state taxes a total of $500 million between 1988 and 1990, has reduced them again in each of the past three years; this year's reduction came to $100 million. New Jersey in just six months has reduced income taxes 15%, half of what once seemed a pie-in-the-sky promise by new Governor Christine Todd Whitman to enact a 30% slash over three years. The reductions have made Whitman not only highly popular locally but also a rising star in national Republican circles.

Some killjoys think the states will rue the day that they got carried away by tax-cut fever. The rise in state revenues is not sustainable, says Hal Hovey, editor and publisher of State Budget & Tax News, a bimonthly publication. He believes spending will again be pushed up by "two elephants": Medicaid spending, which will rise once the economy slows, and the severe pressure of rising prison populations. So states, he thinks, will have to either cut other services or raise taxes again, or both. Vermont Governor Howard Dean, chairman of the National Governors Association, thinks momentarily flush states should put money into contingency funds to cushion the effects of the inevitable next slowdown. "But the legislators can't keep their hands off," he laments. His legislature, against liberal resistance, brought taxes back down to pre-1991 levels, forcing Dean to "cut ((spending on)) all kinds of things from education to welfare" -- an indication of how difficult tax-cut pressure is to resist.

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CREDIT: [TMFONT 1 d #666666 d {Source: Center for the Study of the States}]CAPTION: REVENUES GOING UP

With reporting by Bonnie Angelo/New York, Dan Cray/Los Angeles and Michael Duffy/Washington