State tax cuts are ahead, but smaller

The longest sustained run of state tax cuts in American history - $27.3 billion over six years - will continue in 2000, but the scissors are showing signs of getting dull.

As legislatures wind up the current season, most remain flush with revenues generated by low unemployment, high economic growth, and a booming stock market.

The pregnant purses have allowed states to continue cutting a variety of levies - from property to sales taxes - and still spend money on new school gymnasiums and local blacktop.

But possible changes in the amount of largess coming from Washington, coupled with years of spending increases in many states, is prompting administrators from Olympia to Providence to rethink how much they want to cut taxes in 2000 - if at all.

"So many states have been cutting taxes and increasing spending for so long that they're running out of room to do both," says Nick Jenny, an analyst for the Nelson A. Rockefeller Institute of Government in Albany. "Increasingly, states are finding they are having to choose either one or the other, or neither."

True, states are expected to cut about $5.2 billion in levies this year. But that's still below the $7 billion in reductions enacted in 1999.

One reason for the moderation: Many states have been reducing taxes since 1995, and they know the party can't go on forever. There's also interest in putting some of the surplus funds into much-needed projects - a new airport runway here, a sewage treatment plant there.

"We have done over $700 million in tax cuts since 1995, and now it's time to focus on the services we need to give our citizens - water quality, environmental issues, healthcare initiatives," says Joel Lund, taxation analyst for the state of Iowa. "We're also asking all our agencies to cut operating budgets and shrink their offices. We're starting to have a pinch in many areas and want to free up funds."

Supply-side economics

For now, many states are in the enviable position of being able to cut taxes and still take in more revenue than in past years. The reason, they say, is simple supply-side economics: Leaving more money in the hands of consumers and investors stimulates more personal and corporate income and, thus, tax revenue.

"Despite moving ahead for five years with the most sustained tax cut in state history, the resurgence of the state economy has enabled us to simultaneously report continued revenue increases," says Joe Conway of the New York state budget office. On top of last year's $1.5 billion surplus, his state is projecting $1.8 billion in excess funds this year.

But other state economies are not doing as well. Thus strategies are changing. In Washington, for instance, the state is beginning to suffer general-fund losses from an initiative passed last year that eliminated the state's motor-vehicle excise tax. The loss of about $750 million a year is forcing tough decisions on spending for such things as upgrading roads, building prisons, and underwriting state ferries.

"When that money got wiped out by citizen's initiative, that pretty much wiped out all these projects that had been planned, as well as bonds that were to be sold to finance upgraded services to cities and counties," says Jim Schmidt, a state tax analyst. "That is presenting us with a significant belt-tightening situation statewide, especially in rural areas."

If there is a trend this year to try and walk the tightrope between cutting taxes and saving or spending surpluses, it is to enact short-term or one-time-only tax cuts. These are considered more manageable and don't lock states into reductions for years to come.

Among the popular strategies:

*The "sales tax holiday." For up to two weeks at a time, states forgo sales taxes on such items as clothes and computers. It usually occurs during peak shopping periods, such as at Christmas or just before school starts.

New York, Florida, and Texas started the trend. Now Pennsylvania, Oklahoma, Iowa, and Michigan are joining in.

"Politically they have become very popular," says Mandy Rafool, analyst for the National Conference of State Legislatures.

*The one-time rebate. Following the lead of Connecticut, Colorado, Mississippi, Minnesota, and Wisconsin, several states are looking at sending residents one-shot checks in the mail.

"Right now, states are looking over their shoulders at what will happen at the federal level and trying to be ready for how they might shift priorities," says Patrick Asado of the National Association of State Budget Officers. "When things start slowing down, as they always do, no one wants to be without a seat when the music stops."

*Cuts in food sales taxes. Virginia led the way with a half-cent cut in grocery taxes. Now lawmakers in Tennessee, Minnesota, Kansas, Maine, and Nebraska have made the idea a priority.

*The delayed tax cut. Virginia is also out front in phasing in a variety of tax exemptions - from ones on prescription drugs to motor vehicles.

"The idea which we have found successful in many of these kinds of taxes is to increase their percentages over time until fully imposed," says Jerry Edwards of the state Department of Planning and Budget.

Impact of the Internet

One fiscal uncertainty for all state governments is the growth of e-commerce. Nearly a third of state tax revenues, on average, now come from sales taxes, and the figure is over 50 percent in states like Texas. For now, some of that income is lost when residents forgo shopping at local stores in favor of on-line sellers such as Amazon.com. E-commerce isn't taxed.

Overall, says Terrell Halaska, spokeswoman for the National Governor's Association, "state budgets still look strong, but things are starting to tighten."

(c) Copyright 2000. The Christian Science Publishing Society