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US Coopts Key State Taxes

New federal excise taxes cut into traditional state revenue pie, a `sin' in the states' view

IN the eyes of many state officials, the Clinton administration's intention to use so-called "sin taxes" to help pay for an expansion of health insurance is a sin in itself. Such excise levies on items like tobacco have traditionally been the province of state governments, and when Washington moves in, some of the state revenue goes out.

"If the federal government adds taxes to tobacco, gasoline, alcohol, or any other major commodity the states tax, this increases prices and reduces the yield" as purchases fall, says Dal Forsyth, a lecturer on state and local public finance at Harvard's Kennedy School of Government. When it comes to the sin-tax dollar, "there's a real possibility of competition," he says.

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States get only about 1.5 percent of their total revenues from levies on tobacco and alcohol consumption - a figure likely to grow even smaller as more people spurn these products because of health concerns. But the depth of state fiscal problems in recent years has deepened concerns about the falloff of even secondary revenue sources and has generated a search for new sources as well - including state income and sales taxes where none exist, statewide property taxes, and taxes on services.

So far this fiscal year, most states are not as desperate as a year ago, says Ron Snell, fiscal program director at the National Conference of State Legislatures (NCSL). Revenues generally have been in line with budget projections, but "expenditures - particularly health care - present demands that are very difficult to meet; they're increasing faster than revenues," Mr. Snell says.

Sin taxes raise the issue of "headroom," Snell says - the space left for government to increase such levies. Since these taxes are touted as ways of discouraging the use of a product, they have a lot of headroom. But whatever is filled by Washington is denied to the states. And "excise and sales taxes are, relatively, much more important to the states," Snell says.

Even so, the administration's sin-tax intentions "shouldn't bother the states," says another analyst of public finance, Steve Gold at the Center for the Study of the States in Albany, N.Y. A bigger issue, in his view, is the development of major new forms of taxation by the federal government.

He counts President Clinton's proposed broad-based energy tax among these and sees the possibility, at least, of a federal value-added tax (VAT) down the line. This tax, widely used in Europe, skims off revenue at every level in the production of a good as its value increases.

If Washington opened that door, says Mr. Gold, the states would find it much easier to walk through - just as they did with the income tax. Use of a VAT by states would probably lead to a redesign of their taxation systems, with less reliance on income taxes, analysts say.

In the shorter term, state governments will continue to look for ways to tax services as well as goods, says John Kincaid, executive director of the federal Advisory Commission on Intergovernmental Relations. The political resistance has been fierce where such taxes have been attempted, Mr. Kincaid says, but "the states are still inching toward them."

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States already draw from some 30 revenue sources, ranging from general sales taxes and personal income taxes to license fees and estate and gift taxes. Even with these options, the fiscal squeeze on states continues, Kincaid says. It is caused by a combination of rising expenses and the constitutional or statutory demand in 49 states for a balanced budget. If any state tax base is threatened - including excise taxes on tobacco and alcohol - state officials can be thrown off balance.

And in the states, as in Washington, the revenue search is joined by calls to cut programs and services.

If political pressures keep states from raising present taxes or developing new ones, Kincaid adds, a "cascading effect" sets in: The financial burden is pushed down to local governments, which have little choice but to hike property taxes - always a hot button for voters - or devise new user fees. The prospect of a taxpayer rebellion in the face of tax increases at all levels of government is one significant unknown in the current state-federal tax arena.

Another is the final shape of the administration's health-care plan. About 15 percent of current state budgets go to the federally mandated Medicaid program for low-income people.

According to a January report from the NCSL, 22 states are overbudget for health care - usually because of the 20 percent to 50 percent of Medicaid costs they have to pick up. A few states have special taxes on health-care providers to help shoulder the load, Snell says, but most simply draw on general revenues.

If the Clinton plan can credibly offer the prospect of holding health costs down and thus lightening the burden on state governments, the "sin" of encroaching on tobacco revenues would probably be forgiven.

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