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Published: Thursday, 5/2/2002

Tax-cut plan finds few fans among states

FROM BLADE STAFF AND WIRE REPORTS

COLUMBUS - A growing number of states are balking at the government's new economic stimulus plan, saying it will cost them billions of dollars in business taxes that they desperately need.

Virginia, where the plan would cost the state $310 million over three years, has dropped out. So have Maryland, Massachusetts, Nebraska, and the District of Columbia, and at least five other states - including Ohio - are considering such a move. Twenty states were disconnected from the federal tax code before the stimulus package was approved.

President Bush signed the package into law in March, saying he hoped it would spur business investment and create jobs. It extends regular 26-week unemployment benefits by 13 weeks and provides businesses with a variety of tax breaks.

The nonpartisan Congressional Research Service and state officials estimated the package will cost states $14.7 billion over the next three years.

Critics including the National Governors Association said the package hurts states that are struggling with lingering effects from the recession, falling tax revenue, and higher health-care costs.

The NGA suggested the stimulus plan will force states to slash health benefits and put off education and highway projects.

The U.S. Chamber of Commerce dismissed the worries as political posturing.

"We have very few states that can't afford to provide basic public goods," said Martin Regalia, the chamber's vice president for economic and tax policy. "The problem is they can't afford to do all their pet pork - and their basic goods. Everybody likes to spend, nobody likes to cut."

Critics single out a provision designed to boost business investment in new equipment through a depreciation tax break. Under the new law, the business can deduct 30 percent immediately - followed by 20 percent on the remaining balance - on certain purchases through Sept. 11, 2004. States say the write-offs will cost them hundreds of millions of dollars.

In Ohio, lawmakers facing a potential $1.2 billion deficit are thinking of dropping out of the plan to save $175 million next year.

Tom Zaino, the state's tax commissioner, says the new law would allow businesses to depreciate most equipment, certain software, and leased property much faster than under current federal law. That would reduce Ohio's corporate franchise and personal income-tax bases, he said.

Ohio's proposal is to spread the tax benefits over six years. The result: The state would avoid losing $175 million in revenue in 2002-2003, $125 million in 2003-2004, and $99 million in 2004-2005, Mr. Zaino said.

"This is money that belonged to the state of Ohio," said Senate President Richard Finan, a Republican. "We make those decisions, or we should be making those decisions, not the federal government."

Mr. Zaino called the package unfair since the 20 states disconnected from the federal tax code won't feel any impact.

Mr. Zaino noted that Congress does not have to balance its checkbook.

"Constitutionally, we have to have a balanced budget every year," Mr. Zaino said.

The other states considering dropping out are Connecticut, Oregon, Rhode Island, and Wisconsin.

Dropping out means a state disconnects its tax code from the federal code. Before the recent defections, 28 states had such a link.

Disconnecting from the federal code allows states to avoid the up-front revenue loss since the federal law authorizing the stimulus package wouldn't apply to them.

Dropping out could make a paperwork nightmare for state treasuries, since it will force companies to carry two sets of accounting books - one for the federal code and one for the state.



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