Plenary Session Transcripts

Governors Attending:

Guests:

Discussion Subjects:

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• Plenary Session Discussion Subjects: Federal budget deficit; and tax reform

Points of Interest:

Senator Bob Dole told Governors that Senators were in accord with them on bringing the federal deficit down to about 2 percent of gross national product by the end of FY88, but that no consideration would be given to tax increases until program reduction options had been exhausted. Dole said that he advocated giving the President line item veto authorization, but more important, he supported a balanced budget amendment to the Constitution.

Addressing the Governors about the status of the economy, Federal Reserve Board Chairman Alan Greenspan said that historically high interest rates linked to industry's anticipation of re-ignited inflation had the effect of foreshortening the investment process, resulting in a trend against investment in anything long-lived. Although this negatively affected durables such as heavy industry, the economy remained stable both because of investments in such short-lived areas as high-tech and because high interest rates attracted extraordinary inflow of capital from abroad. At the same time, falling demand for foreign currencies, though it initially strengthened the dollar, was expected to end soon, and with it, the ability to finance our deficits. Consequently, now was the time to take charge of resolving the deficit problem.

Governor William Janklow of South Dakota commented that agricultural states—which were dependent on foreign markets—had been especially hard-hit by high interest rates, which reduced the purchasing power of foreign nations by $4 billion for every percentage point rise. He went on to say that dollar appreciations over the previous few years had cost American farmers $3 billion in export sales.

Notwithstanding Alan Greenspan's comments regarding the strength of the high-tech industry, Governor Michael Dukakis of Massachusetts argued that the cost being added to exported goods (25 to 50 percent) as a result of the overvalued dollar hurt companies in the Northeast such as Wang, which looked to international sales for 30 to 40 percent of their revenue.

A plenary session was devoted to a discussion of three major tax reform proposals: (1) the Bradley-Gephardt bill proposed by Democratic Senator Bill Bradley of New Jersey and Democratic Representative Dick Gephardt of Missouri; (2) the Kemp-Kasten bill, proposed by Republican Representative Jack Kemp of New York and Republican Senator Bob Kasten of Wisconsin; and (3) the Administration's bill.

Senator Bradley told Governors that his proposal would reduce income tax rates to a range of 14 to 30 percent, raise the income a person could earn before having to pay tax, and eliminate numerous loopholes that had been incorporated in the tax code. Lower tax rates would, in Bradley's opinion, stimulate work, savings, and investment. And they would help reduce the deficit by raising an additional $40 billion in federal revenue within four to five years.

Representative Kemp noted that all three tax proposals sharply reduced marginal tax rates while simplifying the tax code, and all removed some special preferences. However, unique to Kemp-Kasten was that it provided for a flat 24 percent marginal income tax bracket, combined with an exclusion of 20 percent of the income from wages and salaries protected from taxation, which offset the Social Security payroll tax. The proposal also sought to double the personal exemption from $1,000 to $2,000. As a result of these provisions, Kemp said that a family of four would not have to start paying tax until their income reached $14,200. In addition, Kemp-Kasten would require upper-bracket taxpayers to bear the same share of the tax burden that the Bradley-Gephardt and Administration proposals required for two reasons. First, high-income taxpayers would start paying the full 24 percent marginal tax rate from the first taxable dollar. Second, only taxpayers with incomes under $40,000 would qualify for the 20-percent wage exclusion. Kemp went on to say that a survey had concluded that in large part because of its stimulation of productivity, Kemp-Kasten would result in $110 billion more in federal revenue by 1990, which would be available for state tax rate reductions.

Kemp also emphasized that while all three tax reform plans preserved the tax exemption for general obligation bonds or public purpose municipal bonds, and all eliminated the exemption for private purpose bonds, Kemp-Kasten proposed to grandfather existing bonds. In addition, the Administration's plan eliminated all state and local tax deductions while Bradley-Gephardt repealed the deductions for sales tax and eliminated deductions for state and local taxes above the 14-percent tax bracket. In contrast, Kemp-Kasten sought to retain deduction of all property taxes, representing about 45 percent of deductible state and local taxes.

Strong objection was expressed by Governors about eliminating the deduction of state and local taxes. Governors also expressed concern about the possibility of eliminating a tax incentive for oil drilling, which could negatively affect domestic energy production. But the members ultimately adopted a policy position supporting the need for federal tax reform.

Governors also discussed an NGA Executive Committee update of the association's position on reducing the federal deficit, which proposed a one-year freeze on all cost-of-living adjustments. Governor Bob Graham of Florida offered an amendment to eliminate the freeze with respect to Social Security payments, particularly in view of the fact that Social Security was an insurance program. Governor Bruce Babbitt of Arizona argued against any freeze because of its disproportionate impact on low-income Americans. As a substitute to Graham's amendment, Babbitt proposed placing a one-year freeze on all cost-of-living increases so long as adequate adjustment was made for low-income federal program beneficiaries. Both the Babbitt and Graham proposals failed, as did an amendment offered by Governor Richard Riley of South Carolina to require that the President submit a balanced budget to Congress.

Memorable Quotes:

Governor George Sinner of North Dakota, in response to Senator Bob Dole's remark that every effort would be made to balance the federal budget through program cuts before tax increases would be considered, said: "Senator, I just have to comment that I am a businessman, and that's a hell of a way to run a railroad. I never saw a business board deal with its oncoming budget and rule out the possibility of finding some new revenue, and of finding some new ways to fund the projects that it needs to fund…from the point of view of this country, believe me, I think it's idiotic. A Republican economist, in whom I have a great deal of respect, told me not long ago that the so-called Tax Reform Act of 1981 was probably the most ignominious act ever passed by the Congress of the United States, because of what it has done to the deficit…and the budget situation in this country…I don't think we can go on with this sort of a syndrome. I think both of us in both parties have to say very loud and clear, "Mr. President, you are dead wrong, we can't go on this way." The whole productive sector of this economy is going to explode sooner or later…"

U.S. Representative Jack Kemp, author of flat tax legislation, said: "It took a lot of courage to invite Jack Kemp to speak before the National Governors' Association. After all, I have been called a voodoo economist and a witch doctor and a snake oil salesman and a dangerous riverboat gambler, and that's just coming from my friends in the Republican Party."

Selected Policy Positions Adopted:
(1) Supporting federal legislation to promote the stabilization of professional sports franchises by providing for an expansion of the National Football League's antitrust exemption; (2) requesting protection of state trust funds in the event of a merger of the railroad unemployment insurance program and the general unemployment insurance program; (3) supporting steps to ensure the adjustment of Food Stamp eligibility and benefits to cost-of-living increases; (4) outlining congressional action necessary to revise the federal system of sanctioning states for social program error rates; (5) urging enactment of Interstate Cost Estimates to ensure the release of highway trust fund monies to the states; (6) supporting, in general, federal tax reform to achieve simplicity, efficiency, and fairness, and to eliminate regional discrepancies; and (7) updating the Governors' call for actions to reduce the federal budget deficit.