Bill Would Put State Tax Law Closer to U.S.

The chairman of the Assembly Revenue and Taxation Committee unveiled legislation Wednesday designed to bring California into “selective” conformity with the sweeping changes in federal tax law that went into effect this year.

Assemblyman Johan Klehs (D-San Leandro) said the measure would reduce the state income taxes of 83% of California’s taxpaying families when fully implemented in 1990.

However, substantial opposition seemed certain to develop.

Gov. George Deukmejian has said that he does not want any tax overhaul to begin to be phased in until 1988. Also, other measures that will compete with Klehs’ are being drafted both in the Assembly and the Senate.

And besides that, Klehs said, opposition is developing from some business groups seeking to preserve tax breaks that would be wiped out or reduced if his legislation is enacted.

“Many of these groups, who weren’t able to stop tax reform in Washington, are now turning their attention to the California Legislature,” the committee chairman said in releasing the amended legislation.

Best Chance of Support

Although rival bills are developing, it is Klehs’ proposal that appears to have the best chance of gaining the support of Democratic leaders in the Assembly. It is an updated version of a proposal introduced last December by Assemblyman Thomas M. Hannigan (D-Fairfield), the Revenue and Taxation Committee’s previous chairman. Hannigan, who stepped up to become majority floor leader in the Assembly, remains close to the bill and will serve as a co-author.

As for Deukmejian, Klehs said he hopes that the governor can be persuaded to support the legislation. The bill’s chief political selling points, Klehs said, are the reductions in tax rates promised taxpayers, as well as the opportunity to avoid the wholesale confusion to Californians that will be created by having two essentially different tax laws in effect--one in Washington and the other in Sacramento.

“The governor was elected by part of those 83% of the taxpayers who are going to get relief under this bill,” Klehs said.

The proposed legislation would repeal a variety of deductions, exemptions and other so-called loopholes in existing tax law. For instance, the deduction of interest on consumer loans would be phased out, as it is under the new federal tax code. Also, the deduction for sales taxes would be eliminated.

The bill would lower the top individual personal income tax rate from the current 11% to 9.8% for the 1987 tax year, then to 9.5% by 1990, as corporate tax breaks are gradually phased out. In addition, the number of tax brackets would be reduced from 11 to 6.

Klehs said the federal law would grant an average tax reduction of 7% to families in the $20,000- to $30,000-a-year range while his bill would provide an 18% reduction. According to Klehs, his bill also would provide tax cuts of 7% for those in the $30,000-to-$50,000 income bracket, and 2% between $50,000 and $100,000. There would be a tax increase for families earning more than $100,000.

The bill is designed to be “revenue neutral,” meaning that it would neither raise nor lower taxes overall. To compensate for reduced revenues from personal income taxes, the bill would eliminate a variety of deductions used by corporations and upper-income taxpayers.

Overall, the staff of the Revenue and Taxation Committee said, the tax bills of 7.6 million families would go down, while 1.7 million families would face higher state tax levies.

Cites Benefits

Klehs said that families with incomes over $200,000 will benefit by a 17% tax reduction under the new federal law, but his bill would raise the taxes of those families by 12%.

By proposing “selective conformity” with federal tax law, Klehs said he was “aiming for a high degree of similarity with federal law.” But he added that he thinks that the state should maintain “an independent tax policy in areas where California has unique needs or unique conditions.”

One rival measure, by Assemblymen Elihu M. Harris (D-Oakland) and Dennis Brown (R-Signal Hill), proposes full conformity of federal and state personal income tax codes. It would greatly simplify state tax returns by fixing the California rate at a simple percentage of the federal tax. Taxes could be filed on a postcard.

However, unlike the Klehs bill, the rival measure proposes no changes in corporate tax codes. Harris and Brown believe that sweeping revisions of corporate tax codes, coupled with major revisions in the personal income tax, is simply too big a problem to wrestle with at this point.

Thinks Timing Is Right

But Klehs said he thinks that the timing is right to revise corporate tax law because of the political climate created by Congress and President Reagan in their sweeping tax reform proposal. The committee chairman also said he thinks that pure conformity would be a mistake because the federal system taxes unemployment compensation as ordinary income, as well as Social Security benefits for upper-income recipients.

Klehs’ proposal would continue the state’s policy of not taxing Social Security benefits or unemployment compensation. The first $1,000 of military pay would also be free from state taxation. Special benefits would be provided to help small businesses, handicapped people, pensioners and minors.

Like federal law, business meals and entertainment expense deductions would be limited to 80% of the amount expended. The proposed legislation would, like federal law, limit deductions allowed for sales taxes, charitable contributions and travel expenses.

The state also would eliminate favored tax treatment of capital gains and losses from passive business investments.

STATE TAX CHANGES

Here is a look at how families would fare under a proposal by Assemblyman Johan Klehs (D-San Leandro), chairman of the Assembly Revenue and Taxation Committee, to bring state taxes into partial conformity with federal tax law.

Avg. U.S. Avg. State Tax Change Tax Change Family Income for 1986 for 1990 Under $10,000 -24% -10% $10,000-15,000 -14% -29% $15,000-20,000 -9% -24% $20,000-30,000 -7% -18% $30,000-50,000 -6% -7% $50,000-100,000 -2% -2% $100,000-200,000 -8% +.2% Over $200,000 -17% +12%

Number of families (in thousands) whose 1990 state taxes will increase or decrease:

No. of No. of Families Families Facing Facing Family Income Increase Decrease Under $10,000 6 87 $10,000-15,000 5 242 $15,000-20,000 14 455 $20,000-30,000 121 1,365 $30,000-50,000 446 2,438 $50,000-100,000 749 2,354 $100,000-200,000 187 470 Over $200,000 63 75 Total (in percent) 17% 83%