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State Tax Trend: Cut and Spend

Some state treasuries are so flush that citizens will get expanded services as well as big tax cuts.

All the extra money that flowed into state treasuries this year could buy 181 Boeing jets (at $155 million each) or 33 Sears Tower buildings (at $850 million each).

Or it could help pay for a big tax cut - which is exactly what 16 states are doing.

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Even more astounding, some of those are in the enviable position of cutting taxes and raising spending, a rare occurrence that has state politicians, especially those up for reelection this fall, beaming like a model in a toothpaste ad.

It's the charging US economy that has yielded a revenue bonanza for statehouses and in Washington. While Congress is still wrangling over what to do with the national surplus, states - which overall are in their strongest financial position since 1980 - have largely settled on their action plans.

Massachusetts, for instance, this week passed its biggest tax cut ever, pledging to return $262 to the average family of four. Kansas, too, made a record tax cut: Homeowners there won't pay a remodeling tax any more, among other things. In Florida, shoppers will have a week-long reprieve on sales taxes for clothes. And on the spending front, education is the big winner.

While this year's $28 billion overflow is making schools and taxpayers richer - and incumbents more secure - experts warn against getting too comfortable. There's always a risk the economy could sour, forcing tough political choices.

Big revenues "create enormous pressure for 'givebacks' and new spending," says Philip Russo Jr., a political scientist at Miami University in Oxford, Ohio. State budget chiefs "know in their hearts they should be saving."

In fact, many are. Twenty-three states shored up their rainy-day funds with this year's surplus, according to a survey by the National Conference of State Legislatures (NCSL). Thirty-two have nest eggs of the size Wall Street deems prudent - at least 5 percent of their general-fund budget.

But the political will to mine the new money is strong.

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Grandiose moment

Take Acting Gov. Paul Cellucci in Massachusetts. The Republican aims to win the governor's title this fall - but has slipped in recent polls. A tax cut can't hurt.

Sitting at a wide wooden desk in a gilded State House hallway on Tuesday, he signed a $770 million tax cut. A bevy of flags and a group of middle-class policemen, airline mechanics, and elderly residents stood attentively behind him on the sweeping marble staircase. He declared, "With this historic cut, we are ensuring that families in the Commonwealth are the beneficiaries of this state's economic good fortune."

But this cut isn't enough for him. Mr. Cellucci is still jockeying to lower the state income-tax rate.

He's hardly the only candidate doing so. In Alabama, Democratic Lt. Gov. Don Siegelman called Tuesday for an $80 million income-tax reduction to help families with children or aging parents. He railed at incumbent Gov. Fob James (R) for merely pledging not to raise taxes - rather than planning to cut them.

In Connecticut last week, long-shot Democratic gubernatorial challenger Barbara Kennelly proposed a 10-percent cut in residents' property-tax bills. It would save the average family $600 over four years. Popular Republican Gov. John Rowland, however, has already arranged for tax-rebate checks to land in residents' mailboxes next week.

The myriad tax-cut plans across the nation are distinct from one another, not only in the size of the cuts but also by how permanent they are.

Cellucci's plan to lower the income-tax rate in Massachusetts, for instance, is longer-lasting - and harder to undo should the economy fall - than is Florida's week-long hiatus on sales tax for clothing.

But for all the political maneuvering, it's unclear how much tax cuts affect voters. Polls rate taxes below education and crime as major issues of concern.

For Brenda, a Boston grandmother who's raising her baby granddaughter, the $202 she's likely to get from the tax cut would be welcome. "Yeah, every bit helps," she says, patting the curly-haired baby during a walk through the sun-flooded Boston Common. "I'd use it for diapers and the house."

Yet for others, the amount is almost trivial. "Wow, I'm going places with that much money," says a facetious Dave Nolan, a Web site programmer at Fidelity Investments in Boston. As a single guy, he stands to get $131 from the new tax cut. "I'd rather take my money and give it to a teacher," he says.

Help for schools

So would a lot of people.

Education is now a top priority for many Americans, and state officials are responding. This year, states boosted education spending more than any other category, according to the NCSL. Overall funds for state colleges jumped 6.2 percent. For K-12, they went up 6 percent. Prison spending, the third biggest item, increased 4.9 percent.

In helping schools, states are mostly aiming to reduce class size and build new schools. Ohio, for instance, will send most of its $901 million revenue windfall back to taxpayers. But $200 million will go for school construction. In Kansas, the $86.4 million education-spending boost includes $20 million for districts bulging with children.

But even as states try to remedy public-school problems, there's another creeping trend that could be costly: the so-called devolution of power from the federal government to the states. The costliest part of this trend, warns Dr. Russo, is welfare reform. "Down the road, states are going to be hard-pressed to cover those costs," he says.

But for now, states, citizens, and school officials range from pleased to euphoric over states' fiscal strength. "It's really too good to be true," says one tax-cut advocate in Washington. "We're looking for the problems with all this - and they're hard to find."

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