New Jersey Republicans, still celebrating their sweep of the Legislature in last month's election, are sobering up to the prospect of a $2.8 billion tax repeal movement gaining momentum among the Legislature's lame-duck Democrats.

"This is similar to the Iraqi army blowing up the oil fields before retreating from Kuwait," said Randall Corman, counsel to the Senate Republicans. "It's a scorched earth policy, no doubt about it."

Besides the obvious budget nightmare the loss of almost $3 billion in revenues would create, incoming lawmakers would also have to contend with erosion of confidence in the state's credit. With a $450 million general obligation issue on deck for next week, market sources say just the talk of tax rollbacks will complicate the sale.

The idea of repealing Gov. Jim Florio's despised tax increases, which he instituted last year to plug a massive deficit and fund an increase in local school aid, was first floated last month by state Democrats reacting to their overwhelming election defeat.

After campaigning on promises to undo the governor's tax packages, Republicans gained a majority in both houses for the first time in 20 years.

The Democrats' six-seat advantage in the Assembly was wiped out and replaced by a veto-proof 36-seat GOP majority. The Senate switched from a Democratic majority of 23 to 17 to a Republican majority of 27 to 13, a margin also large enough to outweigh a veto from the Democratic governor.

But the Republicans will not take control until next month, and some Democrats figure they still have time to carry out their opponents' campaign pledge, forcing their rivals to reinstate taxes the Republicans have fiercely criticized in the past.

The most likely route would be to amend the 1990 tax legislation to include a sunset provision, dissolving the taxes on July 1 -- the start of fiscal 1993 -- unless the new Republican Legislature votes to continue them.

Although no Republicans voted for the tax package last year, many have since distanced themselves from blanket opposition to the entire $2.8 billion initiative.

No repeal bills have yet been introduced in either house, and the only specific proposal Republican leaders have so far said they would endorse would be to roll back a 1% increase in the sales tax -- a move that would immediately open a $550 million gap in the 1992 budget, according to legislative estimates.

Calling the rest of the repeal proposals irresponsible "sour grapes," incoming Republicans are discounting the political mileage Democrats hope to gain.

"We didn't campaign on the basis of repealing everything at once," said Robert Littell, R-Sussex, the incoming chairman of the Senate Budget and Appropriations Committee, Mr. Littell said there is strong support for cutting the sales tax, if revenues can be found to offset the corresponding budget shortfall that move would create. As for other tax rollbacks, Mr. Littell said finding enough offsetting revenues would be difficult, because the state used several large one-shot budget balancers in fiscal 1992.

Steven Hochman, assistant director of state ratings at Moody's Investors Service, said the key credit concern will be maintaining a balanced budget. But he added that the political aspect to the debate cannot be discounted.

"Part of the problem is that it appears this is not being considered as a fiscal measure so much as a political stance, with one side saying, 'You wanted to cut taxes -- well, here you go,'" Mr. Hochman said. "That is not an appropriate way to conduct fiscal policy."

Nancy Feldman, a vice president at Standard & Poor's Corp., agreed finding offsetting revenues or program cuts would be the key ratings consideration, but said it would be premature to speculate on the impact until a more concrete legislative package is unveiled.

Outgoing Senate President John Lynch, D-Middlesex, is expected to introduce several tax repeal-related bills before leaving office on Jan. 14, and Senate sources say they have a chance of passing. Support in the Assembly is less clear, and Gov. Florio has refused to discuss whether he would back the idea until a specific bill arrives on his desk.

Although the outcome of the tax repeal debate is far from certain, just the threat is enough to cause investors discomfort, market sources say.

"The market is nervous, and the general air of less-than-perfect comfort with the state's fiscal policy results in higher prices, "one official at a New Jersey public finance firm said. The official noted that investors are extremely thouchy about budget problems these days, evidenced last month when New York city was forced to delay a $1.3 billion refunding issue after officials in Albany announced the state's budget gap had more than doubled.

Lawrence Singer, New Jersey's director of public finance, said the state plans to fully explain the repeal debate in the official statement for the upcoming bond issue, but the disclosure language has not yet been finalized.

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