Legislators Propose State Tax Code Change : Overhaul to Bring California Into Conformity With U.S. System Would Cut Rates for Millions

About 7.5 million California families would have their state income taxes reduced, while nearly 1 million more would experience hefty increases under a proposal outlined Wednesday in a joint announcement by Assembly and Senate tax committees.

About 500,000 families that now pay state income tax would be freed of their tax obligation altogether if the proposal becomes law.

The good news for most taxpayers and the bad news for some is contained in a proposed tax revision aimed at bringing state codes into basic conformity with the sweeping overhaul of the federal tax system enacted this year by Congress and President Reagan.

The state legislation calls for more than 150 changes in the California tax code.

Many Deductions Eliminated

Under the proposal, the state’s top tax rate would be reduced from 11% to 10%. But many taxpayers would experience overall tax increases because the proposal would eliminate many deductions, such as those now allowed for sales taxes and interest paid on consumer loans. Limits would be placed on other deductions. For instance, only 80% of business expenses for meals and entertainment could be deducted.

The legislation, in following federal tax revisions, also would end shelters that have allowed some upper-income people to substantially reduce or avoid state taxes by deliberately investing in money-losing propositions because of favorable tax consequences.

“Those that are using tax shelters as a way of avoiding tax are targeted in this measure,” said Assemblyman Thomas M. Hannigan (D-Fairfield), who recently stepped down as chairman of the Assembly Revenue and Taxation Committee to take the post of Assembly majority leader.

Co-author of the proposal is Sen. Wadie P. Deddeh (D-Chula Vista), outgoing chairman of the Senate Revenue and Taxation Committee. Deddeh said the proposed changes would simplify the present tax system.

“People want it,” Deddeh said. “It’s simpler for the taxpayer, it’s simpler for the tax preparer, it’s simpler for the tax attorneys, it’s simpler for everybody and it makes sense.”

By making their announcement Wednesday, the Democratic lawmakers got the jump on Republican Gov. George Deukmejian, who indicated during his reelection campaign that he would make a tax revision proposal of his own in January.

‘A Starting Point’

One area of possible disagreement between the governor and Democratic legislators is in the number of tax rates the state will retain. Deukmejian said he favors reducing the number of state tax rates from 11 to two, similar to the new federal tax law that was signed by the President in October. The legislation unveiled Wednesday would allow six tax rates--1%, 2%, 4%, 6%, 8% and 10%, depending on family income.

Hannigan called his proposal “a starting point.” The lawmaker, who will carry the proposal even though he is stepping down as chair of the tax committee, said he expects the proposal to be modified and amended before a final measure is passed.

While the proposal would adopt many of the federal changes, it rejects others.

For example, although the federal government would tax a portion of Social Security income and unemployment benefits, the state would not.

Hannigan said the aim of the legislation is to shift the tax burden among classes of taxpayers without raising or lowering taxes overall.

‘Bill Is Revenue Neutral’

“The bill is revenue neutral. It is not intended to provide tax relief,” the legislator said.

Eliminating tax shelters would automatically raise the state tax obligations of some, thereby decreasing the load carried by others, according to sponsors of the measure.

High-income taxpayers who now use shelters to bring their taxable income down to $10,000 or less would be hit with a 67% increase in their state tax obligation, according to a computer profile of how the legislation would affect different groups.

The computer profile showed that families with $10,000 to $15,000 in annual taxable income would get an average 28% reduction under the plan, while those with a $20,000 to $30,000 income would get a 10% cut, and those in the $50,000 to $100,000 range would be in line for a 2% decrease. Taxpayers earning more than $200,000 would have their state income tax raised an average of 14%.

New ‘Equity Credit’

A portion of the lost deductions could be recovered through a new “equity credit” outlined in the proposed legislation. It would allow taxpayers to claim up to 6% of the deductions they would be entitled to under the present system.

The proposed tax revision is scheduled for the 1987 tax year, the same time the federal changes take effect.

The measure would follow the new federal law by repealing income averaging, which allows taxpayers to offset sharp increases in tax-year income by averaging it against prior years when taxable income was lower.

Also eliminated for state taxpayers would be favorable treatment of capital gains.