Those state budget blues

THE red ink in Massachusetts may be getting more than its share of newspaper ink. After all, Gov. Michael Dukakis has staked his political fortunes on that great symbol of fiscal responsibility, a balanced budget - which is hard to come by this year. But the Bay State chief executive and presidential candidate has company when it comes to frantic budgeteering. Mario Cuomo, another Democrat with a reputation for astute fiscal management, is wrestling with a deficit in New York. Across the continent, and nearly as far away ideologically, California Gov. George Deukmejian peers at a revenue shortfall in the billion-dollar range.

All are supposed to be fairly tight-fisted men governing prosperous states. What gives?

The short answer is the federal income tax reform bill of 1986. That rewrite broadened the tax base, changed the rules for taxing capital gains, and retooled the income tax on corporations - all of which continue to affect state tax collections.

In Massachusetts, New York, and California - states with relatively large numbers of people with investments - the budget analysts have had a particularly hard time projecting how a higher federal tax rate on capital gains will affect state revenues from the same source. They had assumed people would sell more assets back in 1986 to take advantage of the lower federal tax rate in effect that year and make fewer capital-gains transactions in subsequent years. But the drop-off in such transactions was even steeper than most state budget officers had estimated. Hence deficits keep looming into view as each month's revenues fail to match expectations.

On the other side of the ledger, a broadened federal tax base after '86 gave a number of states windfall revenues, since many state taxes follow federal levies. Most of these states, recognizing that surpluses are politically uncomfortable too, quickly altered their tax codes to return the windfall to the taxpayer.

State budgets are complex mechanisms, however, and federal tax code changes are only one factor - if a very immediate one - affecting their balance.

For instance, there's the lingering impact, in such states as California, of revenue shuffling dating back to the taxpayers' revolt of the late '70s. Local property tax caps adopted then shifted much of the funding responsibility for education from local to state government. That shift, plus reformers' demands for more money for schools, has made education the biggest item in most state budgets - on average about half the total.

Analysts at the National Conference of State Legislatures point out that while the states are meeting their obligations, they are living closer to the financial edge than in the recent past. Half the states are expected to end fiscal year 1989 with reserves of less than 3 percent of their general fund spending. A dozen or so could have margins of less than 1 percent. A reserve of 5 percent is considered prudent by budget analysts.

The forecasting of state revenues and spending is much more an art than a science. An economic downturn, or a miscalculation of the number of people likely to apply for medicaid, can quickly turn surplus to deficit.

Since the management of state government - in Massachusetts at least - is likely to be a campaign issue this year, it's well to keep the big, and far from simple, picture in mind.

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