Educators Preparing To Fight Proposed Tax-Reform Plan

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Although the Treasury Department tax-reform package announced last fall has yet to be endorsed by the White House and has taken a back seat to the deficit, educators facing federal budget cuts have been gearing up to fight it for months.

The nation's chief state school officers are expected this week to oppose a key provision of the reform package, labeling it "dangerous to education."

See related story on page 8.

John Martin, director of federal-state relations for the Council of Chief State School Officers, said last week that he anticipates the chiefs' legislative committee will adopt a resolution condemning "any limitation on or elimination of" the deductibility of state and local taxes.

The sweeping Treasury reform package would substitute lower personal-income-tes for the elimination of many popular deductions, including the deductions for state and local taxes on sales, income, and property. Elimination of the deductions would have a disproportionate impact on taxpayers in high-tax, high-income states and localities, including those that spend heavily on education.

Eliminating the deductibility would not by itself cost states and local districts revenues, but it would increase pressure on them to lower taxes, experts say, and would make it more difficult for them to raise taxes to finance education. The elimination of other deductions would offset some of the impact in states that piggyback the federal tax system, but it is not known by how much.

The 'Largest Slash'

At a Washington news conference last month, Albert Shanker, president of the American Federation of Teachers, assailed the notion of eliminating deductions for state and local taxes, saying it would "constitute the largest slash in federal aid to education in our history."

Earlier, at the annual meeting of the Association of American Colleges, John Brademas, the former Democratic congressman from Indiana who is now president of New York University, attempted to rally colleagues against proposed limits on charitable deductions.

"Each of you must enter the battle that will be waged this year in Washington, D.C.," he said. "This is war and we need every one of you in our ranks."

Said 'Revenue-Neutral'

Although the Treasury reform plan is supposed to be "revenue-neutral"--meaning it would not affect the overall level of federal revenues--educators insist that it must be viewed in the context of the Administration's proposed budget cuts.

According to a report on proposed 1986 grants-in-aid to states prepared by Federal Funds Information for States, a states organization, if the tax reform "eliminates the deductibility from federal income taxes of state and local taxes, the federal government will have simultaneously reduced the flow of grants and made it made it more difficult for state and local governments to finance those services themselves."

"The direction is definitely clear," said Gerald Miller, executive director of the National Association of State Budget Officers, an affiliate of the National Governors' Association."It has to have a negative impact on education."

Similarly, the Treasury plan's3proposal to limit the deduction on charitable contributions can only have a negative impact on colleges and universities and tax-exempt private schools, experts say. (See related story on page 8.)

According to a study conducted last year by the House Democratic Study Group, the loss of state and local tax deductibility would cost the average taxpayer who itemizes deductions $1,330. New Yorkers would be the hardest hit, with a loss of nearly $2,400.

$16-Billion Cut Claimed

According to the a.f.t., the elimination of the state and local tax deductibility--by itself--could increase the financial burden on elementary and secondary public schools by as much as $12.7 billion.

Appearing at a news conference with Sen. Daniel P. Moynihan, Democrat of New York, Mr. Shanker said elimination of the deduction would cost schools $271 per pupil nationwide and "wipe out almost a decade" of increased education spending and progress.

The aft's figures are based on the assumption that no one wants their taxes raised, an aide to Senator Moynihan said. Taxpayers now benefiting from the deduction would see their federal taxes raised if it were eliminated, increasing the pressure to lower taxes at the state and local level.

"Since more than half of all property taxes collected in New York go directly to our schools, elimination of this tax deduction would produce this choice: higher taxes or less education," Senator Moynihan said.

"We could keep overall taxes at current levels by lowering state and local rates; but this would, in turn, produce less money for our school systems. Or we could maintain funding for education at current levels, but only by refusing to offset the new federal tax increase with state and local reductions."

"Somebody might come out with numbers twice what the a.f.t. has and some might come out with half," Mr. Martin commented. "Either way, the impact is going to be significant."

'Triple Whammy'

Mr. Brademas described the Administration's tax and budget plans as a "triple whammy" for the nation's colleges and universities.

Not only would cuts in student assistance hurt colleges dependent on tuition, but changes in tax policy would cut private giving to schools and colleges by about one-third, he said. Also, budget cuts and the elimination of deductions would leave state and local governments in no position to help.

The Treasury's proposal to limit the charitable deduction to gifts of more than 2 percent of income would cut cash gifts to colleges and universities by 28 percent, he said, while elimination of the deduction of property gifts assessed at current market value would slash such gifts by 38 percent.

Without disputing Mr. Brademas's numbers, a Treasury Department spokesman said, "We don't think all giving is based on tax considerations," adding that high-income donors "can still give, because there's no cap on donations, just a floor."

Treasury Plan

Donald T. Regan, former Secretary of the Treasury, presented the Administration's tax-reform package last November. The White House has yet to fully endorse it, and in a hearing before the House Budget Committee last month, Secretary of the Treasury James Baker said the President would not sign a tax-reform bill identical to the one outlined by former Secretary Regan.

Mr. Baker added that the Administration had not yet decided whether to present the Congress with legislation or a "set of principles," or whether it would merely seek to shape a proposal together with the Congress.

Whatever strategy emerges, the Administration will not pursue it on Capitol Hill until early May, a spokesman said.

"Not much is happening right at the moment," said Bruce Davie, chief tax economist for the House Ways and Means Committee. "We're waiting for the Administration to get its act together."

Using what it calls a "modified flat tax," the Treasury proposal seeks to trade off lower tax rates for a broadened base, achieved in part through the elimination of most deductions.

It would replace the current 14 individual income brackets with three and lower the top rate from 50 percent to 35 percent. It would alsoate the deduction for stateel25land local taxes; limit deductions for charitable contributions to gifts exceeding 2 percent of an individual's income; and tax fringe benefits, student aid, and unemployment compensation.

Eliminating the deductibility of state and local taxes is a key element of the proposal, because it would account for about $38 billion of the $132 billion needed to finance the rate reduction, according to Mr. Davie.

"It's a big chunk of money," a Treasury Department spokesman said. "Obviously, it would be very difficult to lower rates without it."

Governors Divided

Adoption of the resolution opposing elimination of state and local tax deductibility would set state education leaders apart from the nation's governors, who are divided on the issue and declined to address it at their recent winter meeting in Washington.

Both the education chiefs and the state governors oppose eliminating the deductibility as a means of reducing the federal deficit. But Mr. Martin said the chiefs are particularly concerned that the deductibility issue "could potentially be separated from the rest of the tax-reform proposal."

The governors, who adopted a policy position favoring tax reform at their winter meeting, are split on elimination of the deductions as a means of financing reform.

Some governors, including Mario M. Cuomo, Democrat of New York, are vociferously opposed to the proposal, saying it penalizes states that have "disproportionate burdens." Others, including Richard L. Thornburgh, Republican of Pennsylvania, support the proposal, claiming the deduction amounts to a subsidy of high-tax states.

The National Conference of State Legislatures, which represents state legislative leaders, has a longstanding policy against elimination of the deduction, according to a spokesman.

Vol. 04, Issue 26

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