Governor Favors Passage of Tax Conformity Bill

A high-level Administration official said Wednesday that Gov. George Deukmejian favors passage this year of a bill to conform California to the new federal income tax system but wants its implementation delayed until 1988.

Lonnie Mathis, chief researcher for the state Department of Finance, also told the Senate Revenue and Taxation Committee that Deukmejian will not propose a tax conformity measure of his own. He had indicated during his reelection campaign that he expected to do so.

Although Mathis said the governor will endorse a proposal that neither raises nor lowers the total state tax take, the governor’s decision not to make his own proposal was regarded as a clear sign that he intends to remain on the sidelines of the potentially divisive tax debate.

This was evident also in the go-slow approach advocated by Mathis during the Senate’s first hearing on the conformity issue.

Saying the governor does not want to “create a hardship” on individual or business taxpayers, Mathis told the committee that the Legislature should avoid putting a conformity bill into effect this year because that would leave too little time for taxpayers to plan for the changes.

“We have a problem with making measures retroactive,” Mathis said. “If we made it effective in 1988, taxpayers would be able to address financial planning, be able to get withholding in line with liability and face fewer hardships.”

Mathis also argued that there are more than 100 bills pending on Capitol Hill that would make changes to the federal tax reform measure, which took effect Jan. 1. By waiting, he said, California would eventually end up with a tax plan that is much closer to the federal system.

However, other tax experts who testified before the committee warned that leaving California’s system out of synchronization with federal law this year would be havoc for accountants and others trying to work their way through the maze of conflicting regulations.

“It would create a fair degree of chaos,” said Carol Horowitz, who heads the Franchise Tax Board’s legislative services unit.

Wednesday’s hearing was the first of at least four scheduled by the Senate committee in preparation for drafting a tax conformity bill sometime this spring.

A fairly detailed conformity plan was unveiled late last year in a joint announcement by the Assembly and Senate tax committees.

That proposal, which is expected to form the basis for a bill in the Assembly, would reduce state income taxes for about 7.5 million California families, while raising taxes for about a million others. It also would reduce the state’s top tax rate from 11% to 10%, while making an estimated 150 changes to the California Tax Code.

But Democratic Sen. John Garamendi of Walnut Grove, new chairman of the Senate Revenue and Taxation Committee, indicated that he will not lock the upper chamber into such a detailed proposal until he completes the series of public hearings. His proposal makes only minimal “non-controversial” changes in the Tax Code but would provide the basis for a more comprehensive tax conformity plan that he said could be acted on in mid-May.

Consultants to the committee project that changes in the federal law will have repercussions for California taxpayers if the state does not pass a tax conformity plan. The estimates are that taxpayers in the state would see their income taxes decline by $283 million and corporations would experience a $4-million tax boost.

The gain by taxpayers, however, would mean an equal-sized loss in state revenue at a time when both houses of the Legislature are gearing up for a major fight with the governor over financing public education and other services.

Moreover, if an attempt was made to increase state revenues through a tax conformity bill, the Legislature could find itself bumping up against the so-called Gann limit, a constitutional spending limit drafted by tax crusader Paul Gann and approved by voters in 1979.

Gann Limit

“If we underestimate our revenues,” Garamendi said, “we could smash into the Gann limit. But if we overestimate, we would fall into a budget deficit.”

The Deukmejian Administration has said it would support a bill that stresses simplicity, while neither raising nor lowering the total income tax burden of either business or individual taxpayers. That is a departure from the federal system, which increased the burden on corporate taxpayers, while lowering tax liability for individuals.

Mathis, speaking for the Administration, told the committee that Deukmejian might agree to a minimal tax shift between corporate and individual taxpayers, but he emphasized that such a redistribution of the tax burden “shouldn’t be one of our primary goals.”

He also said that the governor might agree to include provisions like those in the federal plan that tax unemployment benefits and Social Security payments for some individuals. But Mathis said that would be largely offset by lowered tax brackets.