US tax reform may hike state revenues

The tax-overhaul plan being worked out in Washington is likely to spark a second tax-reform revolution -- in the states. The new federal tax bill, apparently well on its way to becoming law, will have an even broader impact if states decide they want their tax system to mirror the federal one. More than half the states, in fact, automatically update their income-tax forms to conform to changes in federal tax law.

Steven Gold of the National Conference of State Legislatures predicts that most states will begin to take action next year ``to conform to most, if not all, aspects of the federal plan.''

But there's a twist. While most taxpayers expect to get a break on their federal taxes, they could find themselves paying more in state taxes.

Why? Many states will probably adopt some of the federal measures for broadening the tax base -- by eliminating or reducing many deductions to taxable income. But if these states don't follow up by reducing the current rates at which income is taxed, as the federal plan does, they reap a windfall at the expense of taxpayers, says David Keating, executive vice-president of the National Taxpayers Union.

California is one case in point. A bill linking the state's taxes to whatever tax changes are adopted by Congress has been passed by the state Assembly and is awaiting action in the Senate. By conforming to the federal plan, without lowering the state tax rates, the bill would generate between $500 million and $750 million in new revenues, according to the California Franchise Tax Board.

With the California Legislature scheduled to adjourn next week, action on the bill is likely to be delayed until the lawmakers reconvene in December. Most other state legislatures are not in session during the summer, but debate on tax reform is likely to be heat up early next year, Mr. Gold says.

At that time, the questions that for months stumped federal tax reformers will resurface in California and other states: Should tax reform be ``revenue-neutral,'' merely simplifying the tax system without raising or lowering revenues? Or should a state keep all or some of the windfall?

Gold says states should ``absolutely'' consider tax reform as a way to raise revenue. ``States should definitely not separate the issues of tax reform and the loss of federal aid [through budget cuts and President Reagan's New Federalism].''

The farm states and oil states, reeling from loss of revenue from their mainstay industries, ``are more likely to hang on to some of this money,'' he adds.

In some states, however, government officials have already pledged to return the surplus money to taxpayers, a move the National Taxpayers Union applauds.

``People don't like taxation without representation,'' Mr. Keating says. If a state wants to keep the windfall, it should first ask permission of its citizens by putting the state tax changes to a vote, he suggests.

The National Taxpayers Union, a lobbying group in Washington, has written to every governor and candidate for governor, urging them to pledge to return the windfall to taxpayers. New York Gov. Mario Cuomo (D) has pledged to do just that, as have Wisconsin Gov. Anthony S. Earl (D), Minnesota Gov. Rudy Perpich (D), and Ohio Gov. Richard F. Celeste (D). So has former Ohio Gov. James Rhodes (R), who is running for the governor's seat.

California Gov. George Deukmejian (R) is firmly on record as opposing any tax increase.

Not all states will have to worry what to do with the windfall; they won't get one. North Dakota, Vermont, and Rhode Island actually expect to lose revenue because their tax rates are closely tied to the federal rates. As federal taxes on income shrink, so do theirs. They may have to consider changing their tax structures to offset the expected revenue losses.

Carolyn Lynch, an analyst with the Advisory Commission on Intergovernmental Relations, a federal agency serving Congress, says that some states may respond by adjusting their marginal tax rates, while others may pick and choose the elements of federal tax law they want to adopt.