State split widens over tax proposal. Reagan plan may prompt some taxpayers to move out of high-tax states
Chicago — President Reagan's tax-reform proposal is forcing new divisions among the states by promising to sharply increase existing tax differences. State economic analysts say current differences among states are minor compared with what they might be if the Mr. Reagan's plan to repeal deductibility of state and local taxes from federal tax payments is adopted.
Many governors whose states have relatively high tax rates are concerned about possibly losing residents and businesses and are more adamantly against the change than those with lower rates.
Along with producing $30 billion in federal revenue annually, eliminating state tax deductibility could step up taxpayer pressure to lower taxes in some states. Its value as a revenue producer makes this proposal a vital component of the administration's tax-reform package.
``What I hear is that many people's tax accountants are telling them they ought to move now,'' says Jerry Miller, director of the National Association of State Budget Officers (NASBO). ``I don't want to say what the ultimate straw is -- nobody knows -- but when you get [tax] differentials in the thousands of dollars by moving across the river, it has to be a factor in your decision.''
Often when Washington speaks, the nation's governors react with a united voice. Threatened by budget cuts, they join hands in a virtual wall of opposition. But on the tax proposal, National Governors' Association (NGA) chairman John Carlin admits there is considerably less unanimity among governors now, than earlier this year.
``There are states which can afford to be casual about this issue, and some felt we shouldn't worry about it,'' says the Democratic governor of Kansas. Governor Carlin, who strongly opposes repealing deductibility, is expected to explain the NGA position in hearings today before the House Ways and Means Committee and next week before the Senate Finance Committee.
NGA policy is designed to be broad enough to allow for the increasing differences within gubernatorial ranks. It holds that the governors are open to tax reform but would consider changes in deductibility only if the effect fell evenly on all states.
``That's been interpreted to mean that we're against total elimination of deductibility,'' observes NGA spokeswoman Ellen Morgenstern.
``We're against the President's plan as proposed but are open to other modifications.'' Most Democratic governors and those who preside over states with relatively high tax rates hold firmly to that NGA position.
But Gov. Mario Cuomo (D) of New York, an outspoken critic of the tax proposal, says it would put high-tax states with heavy responsibilities to the poor at a strong competitive disadvantage.
Kansas' Carlin adds that many low-tax states, such as those with ample energy resources, have effectively been able to import their tax revenue from other states. But many high-tax states face unique problems and often have little choice. ``It's not that they love high taxes,'' he says.
Those opposing elimination of deductibility insist it is middle-and-lower-income Americans who stand to lose most from a change. Yet in pushing for his plan, President Reagan says only one-third of the nation's taxpayers itemize deductions anyway. They have been subsidized all this time by the taxpayer majority, he contends.
A number of governors -- largely Republican and usually from states where taxes are relatively low -- support the President's view and his tax package as a whole. Most of these chief executives calculate that overall benefits to their residents from reduced tax rates would outweigh any disadvantages from removing the deductibility cushion.
Administration supporters include Gov. Dick Thornburgh (R) of Pennsylvania, chairman of the Republican Governors' Association, Illinois Gov. James R. Thompson (R), and Tennessee Gov. Lamar Alexander (R), NGA vice-chairman.
Noting that Tennessee is near the bottom and New York near the top of the state list of per-capita-tax levels, a spokesman for Governor Alexander says: ``We look on the current situation as a tax break for rich New Yorkers.''
Governor Thornburgh similarly questions the fairness of relatively poor states subsidizing relatively wealthy ones. ``He firmly believes that three-fourths of the governors probably agree with him,'' says Thornburgh's press secretary, David Runkel.
But some Republican governors such as George Deukmejian of California, a high-tax state, appear to be caught in the middle. California State Treasurer Jesse Unruh has called the Reagan proposal a ``catastrophe'' for that state. An aide to the governor says Governor Deukmejian issued a statement the day after the President's proposal was unveiled in late May praising the initiative and saying he would analyze its potential effect on California. But he has made no public statement since then.
``I'm sure the White House is leaning on Republican governors to rally around the President . . . but some are having more difficulty following than others,'' notes NGA chairman Carlin.
The proposed repeal of deductibility pits one state against another and is almost sure to deepen the deficit and work against the President's goal of federalism, Carlin says. It is one more case, he says, in which state and local governments are expected (but will find it tougher) to come up with more revenue to take on added responsibilities from Washington.
``I hate to see federal-tax policy interfering with a decision to provide local revenue for a particular need,'' Carlin says. ``And it particularly irritates me when it's a responsibility that's just been shifted back by the same entity that's about to take deductibility away.''
What probably will evolve out of all this controversy is a compromise. The NGA is currently working on its own variation. But the formal concept that appears to have the greatest appeal so far is a measure by Republican Minnesota Sen. David Durenberger to limit state and local tax deductions to the amount exceeding 1 percent of a taxpayer's adjusted gross income.
The Durenberger plan is viewed as an effort to ease concerns of high-tax states and hit them with a fairer share of the load. Senator Durenberger says deductibility is no loophole, but is a protector of state and local government and a friend of the middle class.