Iowa gubernatorial candidates at odds over plan to cut state income tax.

CHICAGO - Candidates for Iowa governor are sparring over whether or not to cut taxes as the state only recently eliminated a large budget deficit.

Gov. Terry Branstad, the Republican incumbent, has proposed a 15% cut in the state's individual income tax phased in over four years. He also has called for eliminating local property taxes on new machinery and equipment, with the state replacing a portion of those lost revenues.

In addition, Branstad's plan calls for the state to pay half of the annual increase in mental health costs for those counties participating in the state's cost containment program.

But his Democratic opponent in the Nov. 8 election, Iowa Attorney General Bonnie Campbell, is warning that a tax cut may be premature given that the state just eliminated its budget deficit as measured on a generally accepted accounting principles basis at the end of fiscal 1994.

"It's as if you had a heart attack and surgery, and once you got out of the hospital, you started putting butter on everything you ate," said Phil Roeder, Campbell's campaign spokesman. "Why risk ruining everything thing you just got over?"

The GAAP deficit, which reached a high of $409, million in fiscal 1992 had been targeted for elimination since 1989, when lawmakers passed a bill requiring, its demise by the end of fiscal 1993. However, after deciding the deadline was unrealistic, lawmakers pushed it back to fiscal 1995.

The state instituted spending reforms, raised the state sales tax by one cent, and looked to accounting changes by the Government Accounting, Standards Board to help erase the deficit.

According to a report released last week from the Iowa department of management, the state is expected to have eliminated the remainder of the deficit a year ahead of schedule. The report estimates the state ended fiscal 1994 on June 30 with a $97 million balance on a GAAP basis.

With the deficit eliminated, spending reforms in place, and revenue growth projected at 4% per year between fiscal 1996 and 1999, the time is right to cut taxes, Branstad contends.

Under his Family Opportunity Plan, Branstad proposes using $829 million of a projected $975 million net surplus over the next four fiscal years to fund the tax cuts.

Roeder said the state might better direct its excess resources to other things besides a tax cut.

"The state has had a lot of unmet needs when it was trying to get out of the deficit," Roeder said.

Those needs include a partially debt-funded fiber optics communications network, infrastructure, education, and reserve funds to ward off future GAAP deficits, he said.

But state budget director Gretchen Tegeler said Branstad's plan would use excess revenues not needed for the tax cuts to fund other priorities, including filling Iowa's cash reserve fund to a level equal to 5% of annual revenues.

She said funding the cash reserve and phasing in the cuts make Branstad's plan "a very secure kind of approach."

Roeder also said that Campbell believes Branstad's revenue growth projections are too high and that her campaign is using a more conservative 3% for its proposals dealing with state taxes and finances. He said that those proposals should be announced in about a week. Branstad's tax cut proposals will be included in a two-year budget he is scheduled to unveil in January, Tegeler said.

Rating agency officials said they would have to study the governor's plan to determine its impact on the state's finances.

Robert Kurtter, a vice president in state ratings at Moody's Investors Service, said candidates for governor in a number of states have proposed tax cuts based on stronger economies and some cost-containments in their state budgets.

"The concern for the future is that those two trends may not continue and may upset budgetary balance if multiyear tax cuts continue to be implemented," Kurtter said.

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