A Taxing Dilemma for the States

When Lee Dreyfus ran for Governor of Wisconsin in 1978, he pledged that if elected he would return the state's growing budget surplus to the taxpayers. The maverick Republican won handily, and promptly signed into law a $976 million tax relief program. "When you recover stolen property," boasted Dreyfus, "it ought to be handed back." Today the surplus is gone. To keep Wisconsin from going into the red in the next fiscal year, the tax-cutting Governor says he must raise the state's gasoline tax by 53% and scrap programs ranging from new highway construction to Milwaukee's student bus service.

The Dreyfus dilemma is shared by many of his fellow Governors, especially in states that have adopted strong tax limitation measures. After the 1978 passage of California's Proposition 13, which slashed property levies by 57%, tax-cut fever spread across the nation like an exotic strain of flu. Yet state officials, who only a year or two ago were burning with the fever, now find themselves trying to balance their budgets, keep from raising taxes, and avoid cutting back on services -- all at the same time. Even where there have not been moves to limit taxes, the Reagan Administration's plans to cut the federal budget will shift all sorts of unexpected spending burdens to the states. Indeed, the early 1980s are shaping up as a difficult time to be a Governor.

Today's fiscal pinch seems tightest in the Midwest, where the tax-cut movement has been fierce. After office in 1978, Minnesota Governor Al Quie approved a $792 million tax relief program. In his budget message last month, however, Quie projected that expenditures for 1981 to 1983 will exceed revenues by $1.37 billion.

He now must find ways to trim the budget accordingly. In Iowa, Republican Governor Robert Ray successfully pushed for a $50 million tax cut in 1979. For the current fiscal year, he has had to pare his budget three times for a total savings of $75 million. The state could still end $22 million in the red. To make ends meet, Ray is pressing for higher cigarette and gasoline levies as well as a new 3% sales tax on out-of-state telephone calls.

In New Hampshire, where taxes are among the nation's lowest, Governor Hugh Gallen wants to slice the state employment rolls by 10% in order to help erase the state's $25 million deficit. Michigan officials were forced to borrow $500 million last month to meet the state's bills, and North Carolina Governor James Hunt is proposing eliminating 1,000 state jobs.

Perhaps no state is in as much financial trouble as Massachusetts, where voters approved a property tax limitation program called Proposition 2 1/2 last November. As a result, the state's 351 cities and towns stand to lose an estimated $600 million in local revenues. Boston, in particular, is suffering. Mayor Kevin White has already proposed a preliminary 1982 budget that is $74 million leaner than the current one of $369 million. White is calling for cuts of 25% in police and fire services and layoffs of 1,600 workers. Yet some experts contend that city officials will have to slash at least $118 million from next year's budget and lay off up to 5,000 municipal employees in order to offset the effects of Proposition 2 1/2.

Says one local financial analyst: "If God came down to Boston, I just don't believe he would be able to trim that amount from the city budget."

Elsewhere in Massachusetts, local officials are scraping for every dollar. In Blackstone, town fathers are considering wiping out weekly trash pickups. In Framingham, officials are planning to close one of the ten elementary schools and, in an effort to reduce the fleet of school buses, they may ask students to stand while riding to school. In Foxboro, the police department even considered destroying its dog Butch, to help cope with budget cuts imposed by Proposition 2 1/2. After a public outcry, Butch was spared.

A few states are making money faster than they can spend it. Texas expects to be at least $500 million in the black by 1983, and Louisiana anticipates a $1 billion surplus by then. Yet even well-to-do states may feel squeezed as Reagan begins to reduce federal spending on social programs. For states already suffering, Reagan's slashes will inflict only more pain.

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