As the governor's race in New Jersey heats up, municipal market officials said the tax cuts proposed by Republican candidate Christie Todd Whitman may hurt the state's credit rating.

Whitman, who is running against Democratic incumbent Jim Florio, recently proposed a 30% state income tax cut to bring the state "out of its worst economic decline in our history."

The latest Associated Press/United Press International poll has Florio running slightly ahead of Whitman. The race has been tight since Whitman defeated former state Attorney General Cary Edwards and James Wallwork in the Republican primary.

In a speech last week, Whitman said that New Jersey's economic recession has "outlasted every other state in the nation by five years," and that only a combination of reduced income taxes and downsized government could help bring the state out of the downturn.

When Florio took office in 1990, he faced a $1.5 billion budget shortfall and $1.3 billion education reform package. His response was to raise taxes by $2.8 billion. The increases, although potentially a political land mine, were approved by both houses of the state Legislature.

In 1991, the Legislature rolled back $600 million of the increases, but Whitman said taxes in the state are still out of line. In her proposal, she said that by restructuring state government, the state could afford the tax cuts.

But rating officials and municipal analysts said yesterday that any cut in state income taxes may cause localities to increase local income and school taxes.

"Frankly, I find it hard to believe that a rollback of this magnitude will be possible through the cutbacks she has proposed," said Anne G. Ross, vice president and manager of municipal research at Roosevelt & Cross Inc. "I would assume that the rating agencies will show some reasonable concerns about this."

Some of the changes Whitman called for include selling the governor's helicopter, reducing the number of state employees earning more than $50,000, cutting the governor's staff by 20%, and privatizing governmental operations where possible.

Whitman said she would lower income taxes by 10% in each of the next three years for everyone making under $80,000 per year. Those making more than $80,000 would get a lesser tax cut.

"The localities in New Jersey will definitely feel the brunt of this plan," Ross said. "It looks like robbing Peter to pay Paul."

In general, campaign promises do not lead to a rating action. One analyst said that substantive problems arise only when the winning candidate is faced with abiding by election promises.

"We usually do not pay that much attention to campaign-year politics," said Steven Hochman, a vice president of state ratings at Moody's Investors Service. "If a program like this came from a sitting governor, we would be watching it much more closely."

Although, the state lost its triple-A rating from Standard & Poor's in 1991 and from Moody's in 1992, New Jersey remains one of the highest-rated states in the nation. The state is rated Aa1 by Moody's and AA-plus by both Standard & Poor's and Fitch Investors Service.

"The state's debt levels are moderate and the wealth levels are high," Hochman said. "Despite all the difficulties, the state is not that weak."

New Jersey is the second wealthiest state in the nation, behind Connecticut.

On the stump, Whitman has said that Florio's tax increases have caused the state's recession to last "five years longer than the rest of the nation."

Analyst Ross said, "That statement looks like an eleventh-hour political ploy. In reality, the state was still going great guns while other states, especially in the Northeast, were starting to struggle."

Hochman agreed. He said that New Jersey has actually had an easier time than some of the New England states.

Ross also said it may not be the best idea to start doling out the money right away when coming out of a recession. "The state might be better served refilling its coffers first," she said.

Hyman Grossman, a managing director at Standard & Poor's said he expects the state to remain on negative outlook until the next budget is passed.

New Jersey has been on the agency's Credit Watch with a negative outlook for the last year and a half.

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