Deukmejian Unlikely to Support Tax Cut in 1985

Although acknowledging that California’s economy is robust and that the state surplus continues to grow, Gov. George Deukmejian seemed Thursday to make official what he has been saying for months: that he will not support a general tax cut in 1985.

In releasing his proposed 1985-86 state budget, Deukmejian carefully sidestepped the question of tax relief but emphasized that the budget’s $1.04-billion reserve is untouchable so the state can “be prepared for any rainy day it might experience.”

Later, a spokesman for the governor said that because the budget includes more spending for education, public works and other programs, “we just don’t see sufficient revenue for a tax cut.”

Nonetheless, calls for immediate tax relief were issued this week by lawmakers on both sides of the aisle, including Assembly Speaker Willie Brown (D-San Francisco), who characterized California’s treasury as being flush with money.

Sentiment for a tax cut has grown with California’s economic recovery, which has triggered a surplus when two years ago there was a $1.5-billion deficit.

Slower Growth Expected The Commission on State Finance projected last month that California would end this fiscal year with a $1.1-billion surplus, higher than the $986 million forecast by Deukmejian. The commission said it believes that a slowdown is probable this year but predicts that the surplus will grow to at least $1.3 billion by the end of the 1985-86 fiscal year.

The growth in the economy is expected to automatically boost tax receipts by nearly $2 billion without a specific tax increase.

These projections are conservative when compared to federal economic forecasts that show the economy moving ahead at nearly twice the pace Deukmejian predicted. Should those projections prove more accurate, the state could end the year with more than $2 billion in the bank.

A tax cut would be consistent with Deukmejian’s conservative fiscal philosophy. But the governor has been heeding the warnings of his advisers that without a reserve of about $1 billion, an emergency or dramatic slowdown in the economy could trigger a deficit in 1986, when he will be facing reelection.

Deukmejian’s budget experts cite uncertainty over the effect of congressional plans to reduce the federal budget deficit and more pessimistic economic projections that could slice as much as $2 billion from tax receipts.

Waiting at least one more year for a tax cut also would give Deukmejian time to digest and build support for the recommendations of a state tax reform commission that is scheduled to report Feb. 1. Sources indicated that it probably will contain some major proposals for simplifying and restructuring the tax system.

But Brown, in saying earlier this week that he supports an immediate tax cut, indicated that he wants to prevent the governor and lawmakers from waiting until 1986, just in time to bolster their popularity at the polls.

If a “tax rebate” is granted this year, Brown said, “no one can be accused of doing it for reelection purposes.”

Brown was not specific on the type or size of a tax cut he would support. Other legislative sources said there has been discussion of a tax cut that would be triggered if revenues rise beyond expectations.

Brown’s comments were made a day after Republican Sen. William Campbell (R-Hacienda Heights) issued a call for an immediate tax cut, saying he would prefer a reduction in personal income taxes.

He conceded, however, that the recent talk of tax relief may simply set the stage for an election-year tax cut.

As long as the surplus exceeds $1 billion, “the sentiment (for a tax cut) is there,” Campbell said. “I’d like it to take effect as soon as possible but if not now, it will be a precursor to act next year.”

One specific tax proposal sure to resurface this year is a longstanding battle over granting tax relief to multinational companies that pay state taxes on their worldwide earnings. Last year’s attempt to repeal the unitary tax on foreign multinational companies was killed under pressure from domestic firms that believe it would have placed them at a competitive disadvantage.