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Here’s the Bad News: State Taxes to Rise With Federal Changes

July 6, 1986

WASHINGTON (AP) _ Federal tax overhaul would result in sharply higher state taxes in more than half the country unless tax rates in these states are lowered to match expected changes in the federal tax code.

Many states haven’t yet calculated the fallout, but at least nine predict revenue increases from higher taxes totaling more than $100 million a year under provisions of the Senate-passed tax bill.

The increases could be as much as 10 to 20 percent in many states, depending on how state taxes are tied to federal levies. New York, for example, would tax its citizens an extra $2 billion, some officials say and Kansas would collect an extra $120 million.

In all, an Associated Press survey shows that federal tax overhaul proposals, if enacted by Congress as expected this fall, would result in higher state taxes in at least 26 states, regardless of whether individuals would be helped or hurt on their federal returns.

The result could be legislative disputes over whether to roll back taxes or take advantage of what amounts to automatic tax increases.

″Tax policy will be one of if not the major issue for state legislatures in 1987,″ said Gerald Miller, director of the National Association of State Budget Officers. ″This is not an issue that can be swept under the rug. They can’t ignore it.″

Michigan officials are already moving to lower rates, and a similar proposal is under study in New York.

A handful of states - principally Nebraska, Vermont and Rhode Island - have an even thornier problem: they calculate personal income taxes as a percentage of federal tax liability, and so the federal changes would cut revenues if officials do not halt the tax loss.

Both the House and Senate have approved lower tax rates and a conference committee is meeting later this month to forge a compromise that is likely to eliminate or reduce many tax advantages.

The Senate bill, for example, sharply limits deductions for charitable donations and interest payments and eliminates the break for capital gains income and the value of tax shelters.

These changes serve to raise a family’s taxable income, but for federal purposes, most taxpayers will then benefit from lower tax rates. But if state rates stay the same, while the taxable income rises, the results are higher tax bills and higher revenues for state government.

In many states, that translates to personal income tax increases of 10 percent to 20 percent, said Miller.

The windfall is as much as $2 billion in New York, according to a state Republican Party estimate. Other big annual increases estimated by state officials include: $250 million in Missouri, $120 million in Kansas, $150 million or more in Michigan, up to $200 million in Colorado, $123 million in Illinois, and at least $200 million in Ohio.

Minnesota expects an extra $360 million over two years. In Virginia, a $130 million windfall is seen from the tax bill passed earlier by the House, and the Senate version would produce far more, though state officials don’t have an estimate yet.

At least 17 more states see lesser increases, or anticipate an increase but haven’t yet reached an estimate.

Already some states have begun planning their own tax changes, even though House and Senate differences have not yet been reconciled.

In New York, Democratic Gov. Mario Cuomo directed his advisers to propose changes in New York’s tax code to prevent automatic state increases.

″My strong support for federal tax reform is coupled with a determination not to allow changes in the federal tax code to trigger an automatic increase in state taxes,″ he said.

In Michigan, Democratic Gov. James Blanchard and the majority Republicans in the state Senate have reached rare agreement that a tax cut is needed.

″I think it’s fairly certain ... if the bill passes, we would lower rates,″ Blanchard said. ″I don’t think anyone here would want to see the state try to reap a windfall off of federal tax reform.″

Some states, though, are eying the windfall. In Virginia, officials are looking for money for roads and have no plans to roll back taxes. In Illinois, Senate Revenue Chairman Dawn Clark Netsch said the windfall will barely make up for the erosion of state money that resulted from the 1981 federal tax cuts.

″It’s possible we might need that money just to maintain the status quo,″ said Kansas Gov. John Carlin. Iowa House Speaker Don Avenson said the windfall may be used to offset what he figures is a loss of $150 million to $250 million a year through federal budget cuts.

In Colorado, state officials say the money could offer the chance to overhaul state taxes, perhaps lessening property taxes.

Among the states that would lose revenues to tax overhaul, Vermont officials expect individual taxes will decline $14 million, or about 20 percent. Anticipating the move, the legislature gave the state tax commissioner authority to adjust state rates to offset the cuts.

In Nebraska, revenue officials estimate a decline of $27 million to $35 million in personal income taxes. One legislative tax leader has called for a special legislative session, but Gov. Bob Kerrey says it’s too early.

″I don’t like reacting to Washington, especially if I don’t know what the impact will be,″ he said.

Officials in Rhode Island, anticipating a $29 million annual loss, are considering changing their tax law to quit relying on the federal code.

″We catch the full impact of the federal changes,″ said state budget officer Lee Grossi. ″Most states don’t.″

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