Columnist Benjamin Grove: State tax hikes, federal cuts just don’t add up

Benjamin Grove

Friday, May 30, 2003 | 5:38 a.m.

AMID GREAT FANFARE at about 2:20 p.m. Wednesday, President Bush signed the $350 billion tax cut bill, the third largest cut in the nation's history. At the same moment, 2,640 miles away, state lawmakers in Carson City were negotiating a record-breaking tax increase.

Here is a quick look at how Bush and Congress adopted a contradictory strategy to the tax-hike plans under consideration in statehouses nationwide -- and why experts say the two approaches may work against each other.

Congress and state legislatures for several years have been in the same boat -- floating on a sea of red ink. But for months federal and state politicians have been paddling in opposite directions.

California is mulling an $8 billion tax hike; state lawmakers in New York overrode Gov. George Pataki's veto of a $2 billion tax increase.

Meanwhile President Bush, amid a media frenzy in the ornate East Room, signed the $350 billion tax cut bill.

What gives? Experts note two important differences between statehouses and Congress.

One: "For the states, it's a matter of ensuring the survival of programs," said Guy Hobbs, who was chairman of the Nevada Governor's Task Force on Tax Policy. States are just trying to keep services and agencies running with less money, he said.

"At the federal level, they are more focused on stimulating the economy nationwide," Hobbs said.

And two: States have strict balanced budget laws to prevent deficits and -- for better or worse -- Congress does not.

"The reason states are raising their taxes is because they have to," said Scott Moody, senior economist with the Tax Foundation, a nonpartisan research group in Washington. "The difference is the federal government is not required to balance its books."

Just one day before he signed the tax cut, Bush privately and without media or cheering supporters signed legislation raising the nation's debt ceiling by $1 trillion, to nearly $7.4 trillion. Lawmakers in Congress who want to cut taxes understood well that the reduction could help propel the deficit into record territory.

"They were fairly explicit -- they don't care" about the deficit, said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal-leaning group.

Baker said manageable short-term deficits are not necessarily a bad thing, if the upside is true economic stimulus. But Baker is among those who argue the tax cut won't stimulate the economy. He said the money would have been better spent helping the states with more direct aid.

Of course the future success of the tax cut is a point of great debate in Washington. What many tax policy experts agree on is that ultimately a federal tax cut won't mesh very well with state tax increases.

"Clearly, any (state) tax increase will blunt the effects of cuts at the federal level," said Pete Sepp, spokesman for the National Taxpayers Union, which lobbies for tax cuts and lower spending. "Raising taxes is never a good idea, especially in an economy that is trying to find its feet."

When state governments cut programs and raise taxes, that tends to slow state economies, agreed Keith Schwer, director of the Center for Business and Economic Research at UNLV. That runs counter to any stimulative effects the tax cut may have, Schwer said.

But Schwer said the jury is still out on just how much the federal tax cut and state tax hikes could cancel each other out.

"There are a lot of unknowns out there in terms of how stimulative these policies will be and over how much time," Schwer said.

The Tax Foundation's Moody noted that in terms of raw numbers, the state tax hikes will not erase federal cuts. California and New York are mulling the biggest hikes -- about $10 billion combined -- and that's only 20 percent of the $50 billion in federal cuts expected for next year as part of Bush's newly minted tax cut, Moody said.

Still, there is no denying the federal cuts and state hikes are conflicting goals, he said.

At the bill-signing ceremony, Bush said, "By ensuring that Americans have more to spend, to save and to invest, this legislation is adding fuel to an economic recovery."

But the engine of that recovery -- the state economies -- is still sputtering. We'll know soon if the Bush tax cut added enough fuel to get it running smoothly.

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