The Reagan administration is seriously considering a proposal to shore up state and local governments by ceding them specified federal tax revenues in the fiscal 1983 budget it is now preparing.
Administration sources said President Reagan has expressed a desire to include such a tax turnback in his state of the union and budget messages to Congress next month.
The nation's governors have lobbied vigorously for a tax turnback to compensate for cuts in conventional forms of federal aid over the last year. But sources said a turnback of tax revenues might be accompanied by a proposal to transfer additional spending obligations to state and local governments, so that it was not clear whether they would emerge net winners.
The tax turnback idea is said to be running "on a separate track" from the rest of the budget work, and in any case Reagan is not expected to turn to the tax side of the budget until he returns from vacation in California next week.
On the spending side, officials said the president has agreed to cuts "in the low $30 billions" for 1983. These, however, would not by themselves be enough to reduce the budget deficit below the $110 billion to $120 billion range, and "it is fair to say the president would not want to send up a budget with a deficit in three digits," an administration source said yesterday.
To rectify this, further spending cuts are likely to be considered next month on top of the $30 billion, he said, as well as possible tax increases. He suggested that these further cuts could include reductions in automatic annual cost-of-living adjustments (COLAs) in assorted federal entitlement or basic benefit programs, which could save the Treasury $15 billion to $20 billion extra in the 1983 budget and $25 billion to $30 billion by 1984.
The president is said to have decided to trim cost-of-living adjustments in one program: the retirement benefits paid to federal employes.
The president is turning to the COLAs because there is little further room for cuts in discretionary programs or in the non-COLA parts of most entitlement programs, the administration aide said. "The big issue is the formulas for COLAs," he reported.
The fiscal 1983 budget is due to be presented to Congress on Feb. 8, together with revised projections for the economy.
The additional spending cuts under study have not been presented to the president, the administration source said, adding that senior officials probably will begin to discuss them early in the New Year.
The spending "cuts" now being discussed for the 1983 budget are cuts from what spending would otherwise be under current law, not cuts from current levels. Spending will still rise, just not as much. And in many programs benefit levels will be reduced.
Another senior official commented yesterday that, as well as further spending cuts, "the tax side is not dead." Several of the president's advisers have urged him to consider raising taxes significantly in 1983 and 1984 to reduce the deficit. Reagan said in a news conference two weeks ago that he had "no plans for increasing taxes in any way."
But since then White House spokesmen have indicated that the president was not ruling out some $22 billion in tax increases that he first proposed in September.
Moreover, Reagan told some reporters last week that "If necessity could convince me that consumption or excise taxes had to be put into effect, I'd be more tolerant of those" than of a reversal of the income and business tax cuts he pushed through Congress last summer.
Candidates for tax increases are excise or consumption taxes, such as on alcohol and tobacco, an additional tax on natural gas linked to deregulation of gas prices, and loophole-closing to broaden the tax base.
The $30 billion of 1983 program cuts which the president has now approved would save about $50 billion by 1984, an official said yesterday. These included $10 billion to $15 billion of 1982 cuts in entitlements, which would produce annual savings of over $20 billion by 1986, an official said. Further 1983 savings of $15 billion to $20 billion from COLA adjustments would save $25 billion to $30 billion by 1984.
Reagan has long talked about shifting additional powers and responsibilities from the federal to the state and local levels and giving state and local governments extra revenue to do the job. State and local governments already already receive about a quarter of their income from the federal government, and about one-eighth of the federal budget goes to the states.
Reagan would rather provide extra resources through tax turnbacks than increased spending, however.
The likeliest method would be to earmark a federal tax for state and local governments and distribute the money in increased general revenue sharing. Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) has mentioned using liquor and tobacco taxes for this purpose, and these are among the working group options before the president.
Administration aides also have discussed levying an oil import fee for distribution to cities and states, and increasing the federal gasoline tax, with part of the proceeds to go to state and local governments to defray highway costs, compensating them for cuts in conventional federal highway aid.