Less than three weeks into their new legislative sessions, state
governments from Boston to Sacramento are awash in proposals to cut
levies ranging from property taxes to penalties on married couples.
But think of them more as potential coupons than big cash
In the five years since the last recession, many states have
built up strong surpluses. Amid sustained economic growth, some
have collected more revenues than their constitutions allow and
must now offer rebates. But instead of large-scale tax cuts like
those in New York and New Jersey in recent years, most of the 29
states now debating reductions are thinking small. Gas-tax cuts in
Connecticut, sales-tax rebates in Arkansas.
The primary reason is Washington. As Congress and President
Clinton strive to balance the budget and reform entitlement
programs, states face a heavier social burden with less federal
support. Yet opinion polls still rank taxes as a top concern.
State officials thus appear eager to offer some tax relief, but
also hope to maintain strong rainy-day funds to protect against
future recession and higher costs to programs like welfare.
"The states are conservative about what they'll give because of
federal devolution and the possibility of an economic downturn,"
says Liz Davis, a tax-policy analyst at the Center for the Study of
the States in Albany, N.Y. "There is so much antitax sentiment that
states are wary of putting themselves in the position of having to
raise taxes again."
Wallet relief from Washington?
The extra $28 you'd receive in New Mexico under Gov. Gary
Johnson's proposed $15 million state income-tax cut, however, isn't
everything. After two years of bitter confrontation and government
shutdowns, Washington also is poised to pass tax relief as part of
a deal to balance the federal budget. Senators from both parties
have offered tax cuts. So has President Clinton. The overlap - and
the will - are significant.
Both sides, for example, favor cutting the tax rate on capital
gains. Republicans would lower the maximum rate to 19.8 percent
from 28 percent, and index capital gains to inflation. Democrats,
who have long resisted cutting this revenue source, now propose
exempting up to $500,000 in profits from home sales. They would
also allow investors who sell small-business stocks to reinvest
earnings without penalty in similar-sized companies.
The two parties in Washington also favor cutting the estate tax
and providing families with either a per-child tax credit or a
tuition deduction to offset college fees.
Does this amount to more in your pocket? Certainly, the child
tax credit would save a family of four $1,000 each year. But the
cuts in capital gains, says Robert Reischauer, former director of
the Congressional Budget Office, won't mean much for the middle
class. The median value of a house in the United States is roughly