CHICAGO -- Gov. Terry Branstad of Iowa last week vetoed a proposed one-cent sales tax increase that would have been used to trim the state's $338 million budget deficit.

The governor rejected the recommended sales tax increase during a special session of the General Assembly, said Richard Vohs, the Republican governor's press secretary. The proposal, intended to generate $272 million a year in revenues, would have begun July 1, the start of fiscal 1993.

The suggested increase, passed earlier this month by the legislature, would have boosted the sales tax to 5% and enabled the legislature to set aside money to reduce the deficit without slashing spending in other areas, according to state officials. The deficit was measured by generally accepted accounting principles.

Gov. Branstad "vetoed the measure because he is committed to getting spending reforms that will assure balanced budgets in the year ahead and into the future," said Mr. Vohs.

"He's pressing for controls on spending in all areas of the budget. The legislature did make progress, but still left major parts -- Medicaid, state employees salaries -- on automatic pilot spending," Mr. Vohs said.

Mr. Vohs said he expects the governor to call another special session of the Democratic-controlled General Assembly to present an alternative plan before the governor's June 3 deadline to sign or veto bills.

"We're reviewing appropriations bills already passed and will determine what action can be taken," Mr. Vohs said.

Senate Majority Leader Bill Hutchins, D-Audubon, said the veto left the governor with few options.

"We funded the budget with the sales tax increase and [Gov. Branstad has] taken the revenue away. He's painted himself into a corner he doesn't know how to get out of," Mr. Hutchins said.

He added that the governor's current options include using his line item veto power, ordering across-the-board cuts, or raising other taxes.

Earlier this month, the Iowa legislature set aside $60 million in the $3.47 billion general fund budget for fiscal 1993 to reduce the deficit. But legislators delayed eliminating the entire GAAP deficit until fiscal 1995.

Under a state law passed in 1989, the state was required to eliminate its GAAP deficit by the end of fiscal 1993. State officials have said the deficit's size made the deadline impractical.

Last year, bond insurers cited the GAAP deficit as one reason they refused to provide credit enhancement on a $91 million Iowa certificates of participation issue. The state eventually persuaded AMBAC Indemnity Corp. to insure the issue, and the certificates were sold last month.

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