Tax Panel Drops Disputed Proposals : Suggested Levies on Groceries, Health Care, Utilities Scrapped

Gov. George Deukmejian’s tax-reform commission, issuing its final report Friday, reversed a previous recommendation that groceries, health services and home utilities be taxed.

The advisory commission also rejected its earlier suggestion that business property be reassessed for property taxes every six years, noting that treating business properties differently than homes “creates an unfair discrimination against business.”

However, the commission retained its recommendations that income taxes be cut $875 million and simplified, that cigarette and alcohol taxes be raised $600 million and that $29 billion worth of sales tax exemptions be ended.

“The commission was vitally concerned with the stability of the state’s revenue sources,” the report said. “It is believed that the changes recommended by the commission should create a more realistic taxing system which reflects current economic conditions and trends and encourages greater voluntary compliance with tax laws.”

The Republican governor created the commission in April, 1984, and ordered it to study the state’s tax system and recommend reforms “that will make the tax system more equitable, reduce abusive tax provisions, equalize the tax burden among our citizens, while not causing an overall increase in taxes.”

The seven members appointed by Deukmejian were lawyers, accountants and economics professors.

The commission submitted its preliminary report to Deukmejian last February. The recommendation that the sales tax be lowered from six cents a dollar to four or five cents and many things now free from the sales tax be taxed, notably groceries, utilities and doctors’ services, had caused the biggest furor.

Deukmejian quickly said he was opposed to levying a sales tax on food, health services “and other essentials of life and any tampering with the spirit and intent of Proposition 13.” Legislative leaders also criticized the grocery tax suggestion. Business groups said the property tax recommendation was anti-business.

Deukmejian had given the commission six extra months to review its suggestions and issue the final report.

The final report was delivered to news offices Friday without comment or fanfare, in contrast to the news conference called to announce the preliminary report in February.

Deukmejian issued a statement after the report’s release, saying he was pleased that the commission offered suggestions for simplifying the tax system. He added that his Administration will study the report “before making any final judgments.”

The report contains only recommendations. The Legislature and Deukmejian would have to approve any changes.

The final recommendations:

- INCOME TAX: Simplify and reduce the tax, cutting it $875 million. Replace the tax levels, which range from 1% to 11%, with a flat tax of 5%, plus a 5% surcharge on incomes more than $30,000 for single taxpayers and $60,000 for joint returns. Eliminate itemized deductions, except for residential mortgages and charitable contributions. Eliminate all credits, except renters’ and other states’ taxes.

The commission said the proposal would mean 80% of the taxpayers would pay less or the same income tax and almost all tax returns would “consist of one page with relatively few line entries.”

- CIGARETTE AND ALCOHOL TAXES: Triple these taxes to reflect inflation since they were last raised and to bring in an additional $800 million.

The commission noted that cigarette and alcohol taxes were last raised in the 1960s or before, while product prices have greatly increased since then.

- SALES TAX: End exemptions for $29 billion in sales not subject to the 6% sales tax, including vessels and aircraft, cargo and refrigeration containers, candy, newspapers and magazines, commercial utilities, admission charges, and hotel and motel bills. Lower the rate eight-tenths of a cent.

Five of the seven commission members also recommended additional study of the grocery, health and home utility exemptions, along with a possible refundable credit for low-income taxpayers.

- PROPERTY TAX: No recommendation in the overall system used since passage of Proposition 13, because the 1978 initiative’s concepts are “so thoroughly ingrained in terms of public acceptance as to be unassailable.” Tighten the definition of new construction and review property tax exemptions for cemeteries, vessels, golf courses and local government property.

- BANK AND CORPORATION TAXES: Study this business tax to identify corporate loopholes that could be eliminated to allow for possible tax reductions.

- BUREAUCRACY: Consolidate the Franchise Tax Board, which handles income taxes, and the Board of Equalization, which handles sales and other taxes, into a new department of revenue. Create a tax court system.