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The Great Surplus Debate: Tax Cuts vs. Education

As states hammer out budgets, California ponders issues that may resurface this fall.

Californians love their cars, but worry about their schools.

Responding to both has ignited a battle royale among politicians here as the state Legislature tries to divvy up the godzilla of state budget surpluses - some $4.4 billion - in a year when state governments as a whole could set a new record for excess revenues.

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The wrestling match in California, focused on whether to use the bulk of the surplus to cut car taxes or increase spending on schools, is not only about dollars. It is also, say analysts, reflective of Democrats and Republicans across the US testing for political formulas that will work amid a thriving economy as they gear up for in-state and congressional elections this November, as well as the presidential race in 2000.

Prosperity and the evolution of the political parties have fuzzed the traditional fiscal line between Republicans and Democrats. Republicans are calibrating their mantra of lower taxes and Democrats are being highly selective about where they advocate higher spending. No one is quite sure of the voter-preferred blend, except that it will be a blend.

"The problem is voters want both, better education and highways and lower taxes," says Donald Kettl, public-affairs professor at the University of Wisconsin, Madison. "Both parties are jockeying to find the position that will be most successful."

California Gov. Pete Wilson (R), a possible 2000 Republican presidential contender, has proposed cutting the state's annual car registration fees by 75 percent in three phases. But if that is a gesture to staunch Republicanism, his 1999 budget also includes an acknowledgment that voters rate education as a top social-policy concern. Wilson's budget gives K-12 public education a half billion dollars more in fiscal 1999 than required by law, a proposal that drew plaudits from Democrats until he trumped it with a car tax cut of nearly $1 billion.

Democrats have rejected a car- tax cut, but have been careful to focus their call for more spending on education - a politically safe topic. "When you're going into the 21st century and have a chance to invest in the state's future, you should do it," says John Burton, president pro tem of the Senate.

In a move of some bravado, Mr. Burton has suggested putting the car tax versus education spending on the November ballot for voters to decide. A spokesman for Governor Wilson says that amounts to "abdicating its responsibility to legislate."

Though the rhetoric is hot, the real process is one of the parties moving toward each other, softening rather than hardening their

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opposing fiscal philosophies.

"This is a process of blurring party lines, at least on fiscal issues. The Democrats realize it isn't all about money. Republicans realize it's at least somewhat about money," says Dan Schnur, a Republican political counsel and former press secretary to Wilson. He notes that the same groping for the right middle ground is under way in Washington as Congress weighs tax cuts and new spending in response to the federal budget surplus.

Because June 30 is the end of the 1998 fiscal year for many states, the battle over what to do with surpluses is raging in several states. In Delaware, for instance, the process began three months ago with Republicans and Democrats differing sharply over the size of a tax cut. But a proposal by the governor to phase out the property tax has moved the parties closer to each other, blurring any clear ideological distinction on fiscal matters.

Tax cuts and rebates have been enacted or are being talked about in a number of other states, including New York, Ohio, Wisconsin, Colorado, and Massachusetts. Last year, Republican Jim Gilmore successfully campaigned for governor of Virginia on a promised cut in the state's car tax.

But nationally, increased spending for infrastructure, certain social programs, and emergency funds is just as prevalent.

"In most states, what you're seeing is a more targeted approach to tax cuts, coupled with some targeted investment and spending as well as putting some aside for a rainy day," says David Liebschutz of the Center for Study of the States at the State University of New York in Albany.

That blanket approach is probably evidence that the parties are aware voters are not overwhelmingly in favor of any one fiscal philosophy. Polls by the Public Policy Institute of California (PPIC) show a slight majority in favor of higher taxes in order to spend more on certain social programs. But 44 percent favor reducing taxes.

Says PPIC pollster Mark Baldassare: "Voters are split at this time, when at other less prosperous times, they would probably be overwhelmingly in favor of a tax cut."

The prosperity is evident in state budget figures gathered by the National Association of State Budget Officers. It estimates that combined state budget surpluses, which are funds that won't be spent by the end of the 1998 fiscal year, will come to about $25 billion. And that number, because it is based on a survey that is several months old, has almost certainly grown since then.

In fact, California's newest $4.4 billion surplus projection alone would push that $25 billion figure beyond the 1997 record figure of $27 billion.

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