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Federal Tax Increases Could Threaten State School Aid

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WASHINGTON--Tax increases under consideration in the Congress could make it more difficult for states to cope with fiscal shortfalls that could threaten education funding, state officials and lobbyists are warning.

Under a plan designed to reduce the federal budget deficit, Congressional leaders are contemplating sizable increases in the federal taxes on gasoline, cigarettes, and alcoholic beverages. Excise taxes on such products are also a major revenue source for many states.

With Congressional Democrats calling for revenue increases of up to $88 billion over three years, state officials are concerned about the effects of such plans on their own revenues.

Higher federal taxes, experts argue, would tend to reduce the consumption of the goods being taxed, lowering state income at a time when many legislatures are already wrestling with funding shortfalls.

And higher federal taxes, the analysts warn, would irritate consumers, making it more dangerous politically for state leaders to raise their own excise levies.

Such a scenario, in turn, could leave public school systems more vulnerable to spending cuts as state officials move to balance their budgets--a step required by virtually every state constitution.

While excise taxes do not account for a large portion of most state budgets, they have proved to be a quick and relatively painless way to resolve short-term cash-flow problems, according to Chris Zimmerman, a tax analyst with the National Conference of State Legislatures.

"They are easy to implement, and you start collecting the additional money almost immediately,'' he said. "It's just a lot easier to make small revenue adjustments.''

Last year, six states raised their taxes on gasoline and other motor fuels, five states increased levies on cigarettes, and one state doubled its tax on alcoholic beverages, according to a survey by the National Governors' Association.

Congressional Consensus

In the Congress, a consensus has emerged that some, if not all, of any federal tax increase will have to come from excise taxes. But President Reagan has expressed an inflexible opposition to any tax increase this year, and most observers agree that he could gather enough votes to sustain a veto of any revenue bill.

Democratic leaders, however, predict that Mr. Reagan will eventually be forced to the negotiating table, if only to prevent deep cuts in the defense budget. And if history is any guide, Congressional staff members say, a revenue compromise will focus heavily on excise taxes.

In both 1982 and 1984, observers note, Mr. Reagan expressed his adamant opposition to new taxes, but eventually accepted increases in levies on cigarettes, gasoline, and liquor.

Representative Dan Rostenkowski, Democrat of Illinois, the powerful chairman of the House Ways and Means Committee, agrees that any plan to increase revenues will lean on excise taxes.

A preliminary proposal advanced by Mr. Rostenkowski this spring would have raised $19 billion next year by increasing the federal gasoline tax by 12 cents per gallon, extending an existing tax on long-distance telephone service, and closing several tax loopholes overlooked in last year's tax-revision act.

The Illinois Democrat has since said he is willing to consider changes in that plan, but has ruled out suggestions that the income-tax rate for wealthy taxpayers be raised.

"We promised people a certain amount of certainty when we did the 1986 [tax] act,'' a spokesman for Mr. Rostenkowski said. "And messing around with the rates is the option that would be least tolerable to the President. It almost guarantees a veto.''

Both the conference of state legislatures and the governors' association have told Congressional leaders that they are concerned about the prospect of federal excise-tax increases, according to spokesmen for the two groups.

Ominous Trend

For the states, this year's developments are part of what many analysts say is an ominous trend toward greater federal use of sales taxes--long considered the exclusive domain of the states and a major source of education funding.

According to the Office of Management and Budget, the federal government collected a total of $33- billion from excise taxes in 1986--only about 4 percent of all federal revenues, but nearly twice as much as it collected a decade ago.

In a 1984 report, the Advisory Commission on Intergovernmental Relations warned, "The threat of federal tax 'pre-emption' of state use of selective excise taxes now constitutes a clear and present danger to state tax systems.''

Until the early 1980's, federal tax policymakers were largely "indifferent'' to such levies, the study noted. In 1981, President Reagan even promised to lower federal excise levies as part of his program to shift more governmental functions to the state and local levels.

But massive budget deficits, combined with the unpopularity of the federal income tax, soon led to a major rethinking of that policy.

For the states, the main threat is the possibility of sizable increases in the federal motor-fuels tax, said Gerald Miller, executive director of the National Association of State Budget Officers.

Mr. Miller estimates that, because of a drop in consumption, a 12-cent-a-gallon increase in the federal gasoline tax would cost the states almost $2- billion in lost revenues in 1988.

Until recently, most state gasoline taxes were earmarked for road and highway construction, as is the federal levy. But like federal policymakers, leaders in several states are eyeing the gas tax as a source of money for other needs, such as schools.

"There is only so much room on the horse,'' said Jack Haden, a spokesman for the Texas state comptroller. "If we jump on, and the feds jump on, you end up with a pretty slow animal.''

As federal policymakers debate the need to raise excise taxes, many state revenue officials harbor an even deeper fear: that continuing deficit pressures will eventually lead to a national sales tax.

In a little-noticed appendix to its 1984 tax-reform proposal, the Treasury Department offered a plan for such a levy, and the idea has been praised by some economists.

"Most states are basically dependent on their sales tax,'' said Mr. Zimmerman of the conference of state legislatures. "Our position has always been that the federal government should rely on its own revenue sources and not infringe on ours.''

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