Should States Pay Taxes Back?

Budget-surplus states debate how to share the wealth - and 24 may return it to taxpayers.

This fall, taxpayers in Connecticut are likely to get a mailbox surprise. Next to the bills and junk mail, they'll find a check from the state.

It won't be some "you may already be a winner" sweepstakes gimmick. Just a check. One hundred dollars for single residents; $150 for heads of households; $200 for couples. It'll come from the $504 million in extra cash the state expects to be in its coffers.

Welcome to the era of state surpluses - and tax cuts. With the economy humming and treasuries bulging, many state leaders are feeling generous. In all, 24 states are weighing tax cuts.

For governors and lawmakers the question becomes: What's the best way to share this wealth? A check in the mail, lower income or sales taxes, or investment in new schools? The answers are being hotly debated, but in the end the wrangling is helping to define the dominant political philosophy and fiscal principles of those governing America today.

The potential political payoff is big: citizens who are happy to share in the wealth - and who may be persuaded that government is doing something right.

Yet the risks are perhaps greater: cynical taxpayers unimpressed by a minor cut. Some voters might rather see the money saved - or spent on school buildings or highways. Cuts also deplete the treasury, which could sting later if the economy sours.

"Good times aren't going to last forever," says Michael Ettlinger of Citizens for Tax Justice in Washington. "To many people, passing big cuts in the face of temporary prosperity seems unwise."

For voters who need to be convinced of the wisdom of a tax cut, the key seems to be in the presentation. It needs to be high impact.

It's a lesson that Connecticut Gov. John Rowland (R) is learning. He brags that in the past three years he's cut $1.2 billion in taxes, yet residents still complain about taxes.

"People hardly notice if a tax cut comes in a slight difference in the withholding in their paychecks," says Dean Pagani, the governor's spokesman. The check-in-the-mailbox approach "is a more dramatic way of showing people the kind of relief they're getting."

But politicians must show that the cut is being done responsibly, too. Connecticut - like most other states - is building up its "rainy day fund." It currently stands at $336 million.

Also, voters may not have their hearts set on tax cuts at all. In polls, they typically put improving education, reducing crime, and dealing with health-care issues above the need for tax cuts.

That may be why many revenue-rich states aren't even considering tax cuts. In California, for instance, Republican Gov. Pete Wilson hopes to use the state's surplus to build a new University of California campus, among other things.

But for states that are embracing the idea, the question is often how big the cut should be. And that largely depends on the philosophy of the leaders.

Typically, conservatives hope to use this "period of plenty to permanently reduce the size of government," says Scott Mackey, an analyst with the National Conference of State Legislatures in Denver. They're doing so by rewriting the tax code to shrink the amount of money flowing into the state's coffers. When the economy cools and revenues shrivel, lawmakers will be forced to cut the size of government even more than during the last round.

TAKE Arizona. Republican Gov. Jane Hull has proposed some $200 million in tax relief. Her plan would permanently reduce the state's motor-vehicle tax, individual income taxes, and business taxes. The biggest decrease would be in the vehicle tax. Residents buying a new $20,000 car would pay $408, instead of the $480 they pay now.

Conservatives herald the cuts as signaling a new era of smaller government - one in which businesses can succeed and help the economy prosper.

But critics warn that state services could suffer when the economy hits a downturn. "You can't look at the situation today and say that's how it's always going to be," says Tom Rex of the Center for Business Research at Arizona State University in Tempe.

"When things get tight again, they'll probably have to cut education spending, because it's the biggest part of the pot," he says. Already, the state is under court order to improve education funding. In fact, the governor may be forced to deal with education inequities before even getting to a tax cut.

Not all tax-cutting states are taking Arizona's revisionist approach. Some, like Connecticut, are moving toward one-time rebates that don't cost the state much in the long term.

Others, like Maine, are using the state surplus to make moderate cuts. Still, the question is how to do it fairly - and with the biggest impact.

Republicans argue that a 1-cent cut in Maine's sales tax is a simple way to reward all citizens, while also helping businesses. It's the same supply-side argument used by conservatives in Arizona.

But more likely to pass in Maine is a property-tax cut, coupled with a small income-tax cut.

To supporters, the property-tax cut is all about fairness. They say the state relies too much on property taxes - and not enough on sales or income tax. "The burden borne by property tax is huge," says state Rep. Steven Rowe. "We've got to do something about it."

Besides, says Mr. Ettlinger of Citizens for Tax Justice, "property taxes are where you get the most political bang for buck. People have an emotional reaction to having to pay so much on their home."