Efforts Revived to Align State, U.S. Tax Codes

The apparent certainty that Congress will vote to overhaul the federal income tax system has revived efforts to simplify California’s income tax code along similar lines.

One bill that would link California taxes to whatever tax changes are eventually adopted by Congress already has passed the Assembly and is awaiting action in the Senate. Assemblyman Elihu M. Harris (D-Oakland), the measure’s author, said he is prepared to press for a vote on his bill immediately.

The prevailing opinion among legislative leaders and top staff consultants is that although there is too little time to forge an agreement before the Legislature’s scheduled Aug. 29 adjournment, the tax bill will become a major issue when the Legislature reconvenes in December.

‘The Big Question’

“It’s a huge job, and how much can you do in a week and a half?” said Martin Helmke, senior consultant to the Senate Revenue and Taxation Committee. “We’re all assuming there will be substantial conformity (to federal taxes), but the extent of that conformity is the big question.”

One of the major roadblocks to a quick agreement on state tax overhaul is the fact that no one knows exactly what impact the federal tax bill will have either on individual California taxpayers or on state and local government.

James Reber, a spokesman for the California Franchise Tax Board, which had studied earlier versions of the federal tax proposal, said the board’s analysis of the tax bill approved by congressional negotiators will not be completed until November at the earliest.

Earlier versions of that bill proposed elimination of federal tax deductions for local and state incomes taxes, curtailment of tax exemptions on bonds used to finance low-cost housing and limits on deductions for vacation homes, all of which were expected to hit California particularly hard.

The final bill, however, retains deductions for local and state income taxes and allows full deductibility of taxes and interest on second homes, although it still would limit tax exemptions on some government bonds.

“We are trying to see what this means to California and what the governor’s stance will be,” said Lois Wallace, an assistant state finance director.

Each year, the Legislature routinely votes on whether to adopt changes to its income taxes to bring it in line with changes in the federal tax code enacted by Congress. While the vote seldom attracts attention, conformity became a major issue last year when an estimated 300,000 California taxpayers who had employer-sponsored pension plans were ordered to pay back taxes because they mistakenly deducted contributions to individual retirement accounts on their state tax returns.

Opposition Buzz Saw

At about the same time, Gov. George Deukmejian’s Tax Reform Commission ran into a buzz saw of opposition when it devised a tax-simplification proposal that would have extended sales taxes to such currently non-taxable items as medicine, groceries, health services and home utilities.

The aim of Harris’ bill, meanwhile, is to make the state tax system so simple that anyone can fill out a tax form in less than five minutes. It would do that by making the state’s definition of adjusted gross income conform to federal law, allowing state tax return filers to merely copy the federal figures onto a one-page state form.

If the bill were to be approved as written, however, tax experts say, it would increase income taxes in California by as much as $1 billion. That is because the bill, while adopting federal cuts in many deductions, does not lower state tax rates in line with the reductions in the federal bill.

Deukmejian already is on record as opposing any tax increase. Moreover, Proposition 4, the 1979 voter-approved initiative aimed at curbing government spending, is on the verge of taking hold, making it unlikely that the state could keep much of that additional money.

Easy to Alleviate

Harris said the problem could easily be alleviated by cutting California income tax rates at the same time that the deductions are brought into conformity with federal law. “That’s not a problem,” he said.

But others suggested that it would be better to keep the higher income tax rates and instead lower sales taxes, which no longer would be deductible under the federal income tax proposal.

With many more pressing issues awaiting the Legislature in its last two weeks, it is a question few members appear ready to tackle.

“There’s just no compulsion to do it,” said Assemblyman Thomas M. Hannigan (D-Fairfield), chairman of the Assembly Revenue and Taxation Committee.

Sen. Wadie P. Deddeh (D-Chula Vista), Hannigan’s Senate counterpart, agreed that there is little reason to move now, but stressed that will change next year. “The pressure to do something will be great,” he said.