POLITICS ’88 : Budget Gap Headed Off, Dukakis Says : Cigarette Tax Hike, Other Fiscal Moves Aimed at Keeping His State in the Black

Massachusetts Gov. Michael S. Dukakis announced Thursday that he would sign into law an increase in his state’s tax on cigarettes, the last major step in closing a budget gap that had been seen as a test of his much-touted managerial ability.

With a new, 5% sales tax expected to yield about $40 million in the fiscal year that begins July 1, Dukakis and his aides are about ready to declare their budget problems solved. And, although Republicans and some conservative Democrats insist that Dukakis, the probable Democratic presidential nominee, has used gimmicks to paper over a fiscal gap, they admit that their charge will not be provable before the election.

“There’s no way to prove that their revenue numbers aren’t correct,” said Barbara Anderson, the head of Citizens for Limited Taxation and one of Dukakis’ fiercest critics. Administration expectations for state corporate tax yields are excessively optimistic, she said, but specific revenues won’t be known until sometime early in 1989.

Manager Issue Neutralized

As a result, an issue that Republicans had hoped to exploit against Dukakis has, for now, probably devolved into an accountant’s squabble unlikely to grab much public attention.

On another matter, Dukakis rejected a proposal, being pushed in several states by allies of the Rev. Jesse Jackson, that the Democratic Party platform endorse the idea of a Palestinian state. Asked whether he was willing to accept Jackson’s position on the matter, Dukakis angrily snapped: “Of course not!”

The only platform language he would endorse, Dukakis said, would be a call for “direct negotiations between Israel and its neighbors and responsible Palestinian leaders” who recognize Israel’s right to exist.

The Democrats should continue to endorse the Jimmy Carter-era Camp David accords, which “provided for limited autonomy on the West Bank” for Palestinians as part of the negotiating process, he said.

But the focus Thursday was more on Dukakis’ approach to his state’s fiscal problems. Like numerous other states, including California, Massachusetts was caught short when it failed to account properly for the impact the revision of federal income tax laws would have on state revenues.

Costly Court Ruling

In addition, the Massachusetts Supreme Judicial Court earlier this month ruled against the state in a tax-accounting dispute with major interstate corporations, and that cost a further $92 million.

Overlaid on those immediate problems was a more long-term reality: The rapid growth of the Massachusetts economy, which brought with it increased tax revenue even after tax cuts, had to slow down sometime. Now it has.

The problems left Massachusetts short about $400 million in the current fiscal year and roughly another $300 million for fiscal 1989.

To resolve that, the governor’s chief administrator, Frank T. Keefe, earlier this year ordered state agencies to cut spending by $287 million, a move that outraged many legislators and constituent groups. Then, last week, Keefe announced a series of maneuvers to tap small state funds for cash, all of which will allow the state to end the current year in the black.

Critics such as Anderson and state House Minority Leader Steven Pierce, however, called the maneuvers a shell game designed to shift the problem over to the fiscal year that begins in July.

Spending Cuts Set

For the new year, Keefe and Dukakis have reduced planned expansions of state programs by about $200 million. They also have put forward what they estimate to be about $200 million in new revenues, including the cigarette levy, changes in corporate taxes, a $75-million measure to make state income tax law conform with federal tax rules, and a so-far undisclosed package of increases in state fees for things like driver’s licenses and car registrations.

The mixture, Dukakis told reporters Thursday, should guarantee that the state “pays its bills (and) does not run up any red ink.”

Dukakis also responded Thursday to a report in the Washington Times that the FBI was investigating whether he or members of his Administration violated federal law in connection with the state’s planned purchase of land for a new prison in the western Massachusetts town of New Braintree.

Story of FBI Probe

The newspaper cited no evidence that any current or former state government official had been interviewed or contacted by the FBI, and Dukakis aides said that to the best of their knowledge, none had been. Neither, they said, had any federal official asked to see any state records connected with the prison.

Thursday afternoon, after telephone conversations between FBI officials and Statehouse counsel Donald K. Stern, FBI Director William S. Sessions issued an unusual statement. Sessions said that while the FBI had conducted a “preliminary inquiry” into the New Braintree case, Dukakis “is not the subject of this investigation or an investigation” into anything else.

Local opponents of the prison have tried with mixed success for more than a year to interest journalists and law enforcement officials in allegations that the current part-owner of the land, who attended high school with Dukakis’ wife, Kitty, and has contributed to Dukakis campaigns, stood to make a substantial profit by selling the land to the state for the new prison.

Thursday, Dukakis’ aides angrily suggested that they had been the victims of an unsubstantiated leak from Justice Department officials to the conservative Washington newspaper. Dukakis denied any wrongdoing by himself or his Administration and said he would “assume” that the press would be “making inquiries of the appropriate federal officials” about that possibility.