Battle Over Bankruptcy

After being defeated in an earlier try for the governorship of Pennsylvania, Democrat Milton Shapp found a winning issue last fall. He charged the Republicans with being big spenders who had brought the state to the verge of bankruptcy. Elected in a landslide that gave the Democrats control of both houses of the legislature for the first time in 32 years, Shapp set out to put the state in financial order--only to find himself in a worse fix than the Republicans. By last week, Pennsylvania had edged even closer to bankruptcy. Shapp's administration was spending $2,000,000 more each day than the state could afford.

It was scarcely all the Governor's fault. As soon as he was inaugurated, he pressured the legislature to enact a personal income tax to help pay Pennsylvania's mounting bills. Three predecessors in the job had tried and failed to get an income tax, but taking advantage of his Democratic majorities in both houses of the legislature, Shapp managed to push one through after little more than a month in office. It barely passed (only one Republican voted for it), but Shapp felt gratified that he had cleared his major hurdle.

Stopgap Measures. He had not reckoned with the State Supreme Court, six of whose seven judges are Republicans with a well-deserved reputation for judicial conservatism. In a 5-2 decision last month, the court ruled the income tax invalid. Because the tax was graduated, the majority held, it violated a provision in the state constitution requiring that "all taxes shall be uniform on the same class of subjects."

Courts in other states have declared that such a uniformity provision does not prohibit a graduated tax, and 33 states have graduated income taxes. But the Pennsylvania court took the narrowest interpretation. Granting that the state had financial problems, the court said, this ''awareness cannot in any way enlarge or affect our limited constitutional role in this adjudication."

Since the decision was handed down, the Shapp administration has been scrambling desperately to stave off bankruptcy. It has resorted to various stopgap appropriation measures and to short-term borrowing. In the meantime, it has helplessly accumulated a debt of more than $200 million. Shapp is not sure whether the government will have to refund the taxes it has collected to date or whether it can use them as credit toward some alternative tax that will be acceptable to the state court. Says the Governor's financial aide, Ed Simon: "We're right back where we started when we took office."

One of Ten. This prospect is not unpleasing to the state's Republicans, who are still smarting from Shapp's campaign oratory. They are also determined to trim his proposed $3.3 billion budget for fiscal year 1972. If he wants an alternative tax, they insist, he will have to slash his spending by some $200 million. They now have the upper hand because Shapp cannot rely on the Democrats to line up solidly once again behind his tax program. Many resent the fact that Shapp, a Democratic insurgent, has cracked down on patronage throughout the state.

Shapp could have spared himself this trouble if he had not insisted on a graduated income tax. A flat-rate income tax, which exists in seven other states, would clearly have been approved by the Pennsylvania Supreme Court. But Shapp feels that such a tax causes the burden to fall unfairly on the less affluent and he wanted to correct this with a schedule of "vanishing credits" that would exempt many low-income people from paying the tax. He is still determined to enact a graduated tax, but this will require a constitutional amendment. Meanwhile, Pennsylvania remains one of ten states without a personal income tax. Only last week, a graduated income tax became law in Connecticut--an unpopular but seemingly inevitable levy in an era of soaring costs of government.

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