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Tax cut fever cools considerably

ALBANY — DOES THE country really have tax-cut fever? The media suggest that it does, but the facts don't. Fiscal prudence reigns.

Most states will probably cut taxes this year, but the indications are that most reductions will be modest. Big tax cuts in New York and New Jersey will be the exceptions.

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It was not supposed to be this way. Last fall, many candidates took their cue from Gov. Christine Todd Whitman of New Jersey and called for big income tax rollbacks.

Two successful candidates, John Rowland of Connecticut and Fife Symington of Arizona, proclaimed that they would zero out their entire state income tax by the end of their terms.

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In January, at least 30 governors proposed tax cuts. While many proposed cuts were moderate, others were large. Gov. Pete Wilson wanted to cut California's personal and corporate income taxes by 15 percent. Gov. George Allen sought to slash Virginia's income and gross receipts taxes by $2.1 billion, even though it would have required large cuts in services.

It looked as if we might be in a new era of lower taxes and smaller government. Not now. The Virginia legislature rejected all of the Allen cuts. New Mexico cut the gasoline tax by 3 cents a gallon but rejected Gov. Gary Johnson's proposals to reduce the income tax and other taxes.

Income tax cuts face strong opposition and are unlikely to be enacted in California, Massachusetts, Wisconsin and other states.

In Wisconsin, the legislature is controlled by Republicans, who could be expected to support the Republican governor, Tommy Thompson. But two legislative leaders told him they do not detect "a great hue and cry" to cut the income tax rate, and instead prefer to restore funds for social programs.

Mostly, the cuts being adopted are not large. Arizona, Georgia, Idaho, Kentucky, Michigan and Utah have passed small to moderate cuts of 1 to 4 percent of annual tax revenue.

The situation is unclear in Connecticut, where the governor's proposal was much smaller than the cut he campaigned on. Nor is the Arizona income tax likely to vanish.

Tax cuts are common a few years after a recession because most big tax increases are enacted during fiscal crises that accompany recessions. As the economy recovers, states build budget surpluses. They can spend this money, save it or cut taxes -- often some of each.

States with recurring surpluses can cut taxes moderately without reducing services. But that can't be done in states with built-in deficits, where revenue falls persistently short of what is needed to maintain existing services.

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Except in New Jersey and New York, legislators are concluding that it is more important to maintain services than to cut taxes sharply. Many are cautious because of impending reductions in federal aid and fears that economic growth will slow.

In the past, post-recession tax cuts petered out after one or two years. The current wave will probably follow that pattern. But the real test will come during the next recession.

Gov. William Weld of Massachusetts and Gov. John Engler of Michigan rejected all tax increases in 1991 and 1992, when their states had brutal fiscal crises. They not only survived but also won re-election last year. They could have more emulators when the next recession hits.

With states in a competitive struggle for economic development, the pressure to restrain taxes will persist. But don't expect states to cut taxes willy-nilly.

Steven D. Gold is director of the Center for the Study of the States at the Nelson A. Rockefeller Institute of Government.


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