Reagan tax reform vs. school reform
IN 1983, President Reagan sounded the clarion call that our education system was in trouble. He urged all of us -- parents, teachers, concerned citizens -- to ``say yes to the challenge of a national agenda for excellence'' in education. In two years, the American public has heeded the President's call. Nearly every governor and legislature across the nation has adopted education reform as a top priority.
From Tennessee to Massachusetts to California to Texas, record budgets coupled with major tax increases have been approved for education, along with a toughening of standards and creating incentives to attract and keep talented teachers.
Now, the President who has made a compelling case for education reform as a national issue, but who does not believe the federal government should pay any of the costs, is pushing a tax-reform plan that would severely hamstring education reform efforts by eliminating the deductibility of taxes paid to state and local governments.
State and local education agencies derive about $16.5 billion annually through the deductibility option. Many may not realize it, but this is by far the federal government's largest contribution to education and exceeds the current US Department of Education budget of $15 billion.
Almost everyone favors a simplified tax system, one that allows fewer deductions and one that does not take a lawyer or accountant to figure out. People will like a system that makes it far less likely for ``the other guy'' to cheat. But there is no reason a reform plan can't leave alone this very popular deduction, which is based on the idea that you should not have to pay taxes on other taxes you've already paid.
The American people want tax reform, but skepticism is mounting over the plan President Reagan has delivered to Congress, and recent polls indicate that support is diminishing. A recent CBS News poll indicated only 13 percent of Americans believe their taxes would be reduced, and 40 percent thought their taxes would go up.
In terms of which deductions should be retained, those polled thought state and local deductions should remain.
What's behind this change in the public mood?
There's growing concern that the Reagan plan is not ``revenue neutral,'' as the administration contends, but rather, would actually reduce the government's tax receipts in years ahead. The result would be to increase the huge federal deficit, which everyone knows has to be reduced. The Congressional Budget Office recently estimated that under the President's plan, there would be a signifcant decrease in corporate tax receipts starting just five years from now.
There is doubt the President was accurate when he told the nation who the winners and losers would be under his plan. It now turns out that there would be a lot of losers among those the administration said would either win or break even under the new tax proposals.
In pushing his plan to eliminate the deductibility of state and local taxes, the President said that two-thirds of taxpayers don't itemize their deductions, don't deduct state and local taxes, and, therefore, would not be affected by this huge change. It just isn't so.
According to the ``IRS Statistics of Income -- 1982 Individual Income Tax Returns,'' nearly 41 percent of taxpayers itemize their returns, and virtually all of them take the deduction for state and local property and other taxes. In a number of states, nearly half to more than half the taxpayers itemize and benefit from the deduction.
Here are the percentages of itemizers in these states -- and the figure in parentheses is the estimated tax increase for each itemizer under the Reagan plan to eliminate deductibility: Arizona, 48 percent ($614); California, 47 percent ($1,000); Colorado, 51 percent ($778); Maryland, 51 percent ($1,208); Massachusetts, 45 percent ($1,246); Michigan, 50 percent ($1,075); Minnesota, 50 percent ($1,132); Nevada, 46 percent ($367); New Jersey, 47 percent ($1,129); New York, 51 percent ($1,646); Oregon, 49 p ercent ($908); Utah, 58 percent ($666); Vermont, 47 percent ($1,003); Wisconsin, 49 percent ($1,128).
There is genuine concern about the economic viability of states, should the deductibility of state and local taxes be eliminated. Of the top 10 so-called high-tax states, five would not have been on the list 20 years ago. A senator from Alaska worries aloud that while his state is currently on the low-tax list, it is an undeveloped state that may well have to raise taxes to meet its needs in the years ahead. School reform is proceeding at a fast pace in Texas and new taxes have been levied to do it -- b ut if the Reagan plan had been in effect over the last several years, would Texas have been willing to go along?
Murray L. Weidenbaum, former chairman of the Council of Economic Advisers, has come out against the tax-reform proosal. He points out the basic contradiction is what the administration is attempting to do: ``At a time when the federal government, properly, is attempting to return some domestic public sector responsibilities to state and local governments, the federal government is reducing their basic fundamental underpinning. It is trying to do it on both sides of the federal budget simultaneously -- r educing grants-in-aid and proposing elimination of the deductibility of state and local taxes.''
The most devastating effect of the loss of deductibility will be on state and school districts trying to institute the reforms that the President's own commission recommended -- with diminishing federal help.
Albert Shanker is president of the American Federation of Teachers.