$1-Billion State Tax Boost Proposed by Key Assemblyman

The Democratic chairman of the Assembly Ways and Means Committee on Wednesday proposed raising state taxes by $1 billion to provide new financing for education and health programs.

Going against a 10-year trend of tax cutting, the plan unveiled by Assemblyman John Vasconcellos of San Jose is the first proposal for a general tax increase since unsuccessful efforts in 1983, when the state faced a $1.5-billion deficit.

Vasconcellos said he believes that the chief selling point of his plan is that it would raise $1 billion in state tax revenues while actually decreasing Californians’ overall tax bill. That could be accomplished, he said, by balancing a roughly 30% to 33% increase in state corporate and personal income taxes with a two-cent reduction in the sales tax.

The biggest loser under the plan, he said, would be the federal government. The legislator noted that since sales taxes are no longer allowed as deductions on federal returns and state income taxes are, Californians would derive a major federal tax benefit under his proposal.

A combination of the state sales tax reduction and the federal allowance for deduction of the state income tax would result in a net tax saving of $308 million, Vasconcellos contended in outlining his tax plan.

The proposal drew fire immediately from Gov. George Deukmejian. The governor charged that the plan was concocted largely to finance a $900-million spending increase for public schools that is being pushed by Vasconcellos and Supt. of Public Instruction Bill Honig, a Deukmejian adversary.

“Assemblyman John Vasconcellos’ tax increase package can only be seen as Bill Honig’s assault on the taxpayers. The other shoe has now dropped on the superintendent’s hoax to increase school spending by $900 million,” Deukmejian said in a statement released by his office. The statement did not address Vasconcellos’ argument that Californians would end up paying less in overall taxes if the federal reduction was considered.

Deukmejian added, “Families can’t afford the staggering increase in income taxes that the superintendent’s package requires. And, if we want businesses to create more jobs, it makes no sense to slap them with a huge business tax increase.”

Vasconcellos insisted that the plan is his own and that he is not working in concert with Honig.

The proposal, announced at a Capitol news conference, is so new that key legislators said they would not comment until they had a chance to analyze the proposal.

Assembly Speaker Willie Brown (D-San Francisco) showed up unexpectedly at Vasconcellos’ news conference and listened along with reporters. Brown said it was the first time he had heard the full proposal outlined. “It may very well be workable,” the Speaker said, but withheld judgment.

There are now at least three major tax proposals at various stages of development in the Legislature, including one by Assemblyman Johan Klehs (D-San Leandro), chairman of the Assembly Revenue and Taxation Committee. Each is designed to bring state tax codes into various degrees of conformity with the new changes in federal tax law that went into effect this year. So far, all three are intended to be “revenue neutral,” meaning that the idea is to neither raise nor lower taxes.

But Vasconcellos, who presides over budget hearings in the lower house, said current state revenues were not enough to adequately finance education, health, transportation and other programs.

Vasconcellos said he drew up the tax proposal because Deukmejian challenged lawmakers to identify sources of revenue when they propose increased spending levels.

Besides Deukmejian’s opposition, another obstacle facing Vasconcellos is the limit on state spending established in the California Constitution in 1979. As the law now stands, the state could not spend an additional $1 billion even if it had it.

Vasconcellos said he would join other state officers, such as state school chief Honig, in trying to modify the spending limit through a ballot initiative. In the meantime, Vasconcellos said, the additional revenues could be given directly to school districts and counties.

Briefly, here is the arithmetic Vasconcellos used to support his contention that state taxpayers, overall, would actually benefit from his proposal:

Under his plan, state personal income taxes would be increased by $4.4 billion, or about 33%. At the same time, the two-cents-per-dollar reduction in the sales tax (from the current rate of 6%), would produce a $3.4-billion tax savings. Thus, the net gain to the state treasury (and additional cost to taxpayers) would be $1 billion. However, individual Californians would be allowed to claim higher deductions on their federal returns and reduce their federal taxes by $1.3 billion, he said. Thus, taxpayers would be paying $300 million less in combined state and federal taxes.

Vasconcellos estimated that the sales tax reduction would save banks and corporations $1.4 billion, exactly the amount that they would pay in additional taxes on corporate income.

The Vasconcellos plan also calls for full conformity with federal tax codes, although the lawmaker said he is willing to compromise on several features of the federal tax law that are unpopular with fellow legislators. Among the most unpopular are the federal policy of taxing unemployment benefits and a portion of Social Security income for upper-income recipients.