Governors lay it on the line: Adapt (new tax policies) or go broke

Cisco exec tells them states must improve education

The nation´s governors were wowed by Cisco Systems CEO John
Chambers on Sunday, as he buoyantly spoke of an unprecedented
era of prosperity built on technology.

Dan Popkey- The Idaho Statesman

But if states want to benefit, they´ll have to invest in education —
something we in Idaho took a step back on this year because of an
ill-timed 2001 tax cut.

Responding to a question from Gov. Dirk Kempthorne — who signed
off on cuts in higher education and public schools in the 2002
legislative session — Chambers said the formula for growth isn´t all
that complicated.

“The jobs will go where the best educated work force is, where the
right infrastructure is, with the right supportive government,” said the
man who runs the world´s leading Internet networking company.

Chambers said success demands smaller class size, higher teacher pay and competition for
public schools. Idaho has made progress on the latter, with a growing number of charter
schools. But with a $150 million deficit looming for fiscal 2004, schools face a huge hit.

Lawmakers and Kempthorne are reluctant to talk about it until after the election, but the best
way to stop crippling education cuts — absent a quick economic rebound — is to take on a
sacred cow: the sales tax exemptions that cost Idaho $1 billion a year. About $660 million of
that is because Idaho, like most states, doesn´t tax services, such as the work of doctors,
lawyers, accountants and auto mechanics.

The subject is on nearly every governor´s mind here.

NGA Chairman John Engler, a Republican from Michigan, opened the conference Friday
saying he had fingers crossed about delicately balanced budgets and called on the feds for
help with health care.

But he also said states must do something for themselves to adapt to an economy where 70
percent of transactions are for services.

“The economy is more and more dominated by services, so there´s some structural issues
that at the state level people are going to have to be looking at,” he said. “We´d like to do
more with less, but if you look at local government spending, state government spending and
federal government spending, guess who´s been the most constrained? It´s state government
over quite a period of time.”

Saturday, I spoke with five more governors about sales tax exemptions, and they made one
thing clear: Reforming the system will be very tough.

Oklahoma Republican Frank Keating spent eight years attempting to repeal the income and
capital gains taxes and replace them with a broad sales tax.

“That´s one debate that I just simply was never able to win,” said Keating, a popular
term-limited governor in his final months in office. “I lost my own caucus. The Republicans
were beaten up by the doctors and the lawyers and the accountants and the Realtors and the
bankers and the barbers.”

It´s unlikely Idaho would attempt a plan as novel as Keating´s. What´s quietly on the table
here is repeal of service and other sales tax exemptions coupled with a cut in the 5 percent
rate.

Utah Republican Gov. Mike Leavitt has a way to sell that idea. “As the economy continues
more toward services and the tax base continues to erode, fewer people pay more,” he said.
“Good tax policy is when more people pay less.

“States will have to decide whether they´re going to raise the tax or lower it. If you lower it, you
have to broaden it. It´s my belief that states will look at that and say, ´Would I rather have a 5
percent sales tax or a 3 percent sales tax?´ I´m thinking 3 percent sounds better.”

New Mexico Republican Gary Johnson has a different view. He´s in a rare state that taxes
services, but thinks it´s a bum idea. “It´s a huge impediment to our state being competitive.
It´s a handicap for an engineering firm, for example, to compete nationally.”

West Virginia Democrat Bob Wise, in office 18 months, plans to review taxes to adapt to a
changed economy but is reluctant to move quickly. This year, he signed incentives intended
to lure jobs rather than take on broad reform. “I had to deal with what I had to deal with right
away, and that was revamping our tax incentive package,” Wise said.

Virginia Democrat Mark Warner may have the toughest task of all, with a system dependent
on property taxes that constrains local governments. “We have a tax code that was not even
developed for the Industrial Age, let alone the Information Age,” said Warner, who was
elected in November.

“The question is: Will you fix it with one change, or do you really look at the whole relationship
between a state and localities, as well as the underpinnings of how the state generates
revenue?”

Warner is an ambitious sort, but recognizes that he´ll have a tough sell when he unveils his
plan for lawmakers in January — the beginning of the Virginia election year. “There is some
sense that they will be reluctant to roll up their sleeves when you´ve got the whole House and
the Senate up to grapple with tax restructuring.”

That´s exactly why Idaho lawmakers and Kempthorne ducked the issue this year. But if they
care about our future, come January they´ll wrestle with one of the most vital issues of the
near term.

http://204.228.236.37/story.asp?ID=15266