Legislators See Conformity of State, U.S. Tax Laws This Year

Chairmen of the tax-writing committees in the Legislature, who have begun the painstaking task of overhauling California’s income tax system, say they are certain now that a measure will be passed this session to closely conform state codes with newly revised federal law.

The key lawmakers in the Senate and Assembly also are in general agreement that any tax measure sent to the governor’s desk will take effect this tax year--eliminating potential confusion for millions of taxpayers, who otherwise would be forced to deal with two vastly different systems when computing their returns next April.

Nearly a half-dozen tax conformity bills have been introduced or are being written in response to last year’s dramatic shake-up of federal income taxes. But none are expected to be in lock step with the federal system, bowing instead to the same pressures that resulted in a California tax code that is more generous to renters and the elderly and even provides tax credits to support endangered species.

Shifting the Burden

While most of those crafting the new tax policies emphasize that the final bill will neither result in an overall tax increase nor in a tax cut, all of the proposals would shift the burden somewhat, granting relief to most low- and middle-income Californians while putting a larger bite on a smaller number of wealthier individuals.

Regardless of what form the final version takes, however, state taxes are bound to become a more important factor for most individual and business taxpayers, since the dramatic cut in federal tax rates has significantly narrowed the gap between the federal and state systems.

“The lobbyists are certainly interested in what we are doing,” said Sen. John Garamendi (D-Walnut Grove), who chairs the Senate’s tax-writing committee. “Everyone from Common Cause to labor unions to various business interests have all expressed great interest in this legislation.”

Garamendi, who is in the process of drafting his own tax-conformity bill, said he initially had deep reservations about passing a comprehensive conformity bill this year, but is now convinced that “the price of waiting would be chaos next April during an election year.”

Chairman Johan Klehs (D-San Leandro) of the Assembly Revenue and Taxation Committee said he believes that public opinion will eclipse special interest lobbying as soon as taxpayers see the benefits to themselves and realize “the huge revenue losses that we will incur if we give in to special interests.”

Of those introduced thus far, the two bills that are believed to stand the best chance of passage would lower taxes for most individuals while shifting the burden, mainly to those in higher tax brackets. They would do that by curtailing or repealing many of the same deductions targeted by the federal tax overhaul, including deductions for most medical bills, moving expenses, consumer interest charges, sales taxes, union dues, business meals and business entertainment expenses.

One of those measures, introduced by Klehs, would reduce income taxes for 83% of California’s taxpaying families when fully implemented in 1990. It would do that partly by reducing the maximum state income tax rate from 11% to 9.8% this year and 9.5% in 1990, and would reduce the number of tax brackets from 11 to 6.

It also would conform with the new federal tax code in 150 areas but preserve a number of popular deductions and tax credits for businesses, renters, the elderly and the handicapped. It also would exclude from taxation Social Security and unemployment benefits, some of which will be taxed at the federal level.

Close to Conformity

The other bill, a bipartisan measure authored by Democratic Assemblyman Elihu M. Harris of Oakland and Republican Assemblyman Dennis Brown of Signal Hill, seeks almost complete conformity with the federal tax code. As such, taxpayers could file their returns with a simple one-page sheet, perhaps even on an oversized postcard that could be completed in a matter of minutes.

Harris’ bill would lower the top tax rate to 9%, with just four tax brackets overall. However, it also would boost taxes for 42% of individuals, including those with incomes from $10,000 to $30,000 and those in certain higher brackets. It would grant relief to about 58% of taxpayers, mainly those earning less than $10,000 a year.

The question of which way to go--greater conformity and simplicity or more broad-based tax relief coupled with tax breaks for certain groups--has already begun to divide members of the Legislature. Those divisions became evident Monday night when the tax committee chaired by Klehs was unable to decide between the two plans and instead voted to approve both.

Klehs acknowledged after the hearing that neither bill had enough support on its own. Approving both, he said, was the only way to “avert a suicide” and keep tax conformity efforts alive.

Caught in a Trap

Even Republican Gov. George Deukmejian was caught in a trap when his aides announced at the hearing that he favors the Harris-Brown bill, mainly because of its simplicity and its bipartisan sponsorship. Yet the governor, who has steadfastly opposed higher taxes, now finds himself supporting a plan that would raise taxes for 42% of the public.

Harris said he intends to adjust the tax rates in his bill to broaden the number of taxpayers who would obtain relief under his measure. “I expect it to shift dramatically,” Harris said, adding that an early analysis of his bill had been flawed.

It also was clear from Monday night’s hearing that all of the plans will have to withstand a major assault by special interests, some of which hope to recapture losses dealt them under the federal tax overhaul.

Nearly two dozen lobbyists representing such diverse interests as real estate, high-tech industries and endangered animals paraded before the committee, each asking for special treatment and arguing that California ought not to fall into the trap of merely mimicking the federal tax plan. The real estate industry, which was among those most severely affected by the federal tax plan, is expected to be at the forefront of those efforts.

Widespread Concern

Underlying the entire debate on tax conformity is a widespread concern that tax writers may be largely groping in the dark, unsure of the exact impact of proposed changes to the state tax code or what effect federal tax changes will have on the financial behavior of California taxpayers.

The fear is that a miscalculation could lead to a tax surplus, or of greater concern, a big state deficit in 1988, fueling pressure for an election-year tax increase. Deukmejian already has let it be known that while he favors passage of a tax-conformity bill this year, he would rather that it take effect beginning in the 1988 tax year, after the effects of federal tax conformity are known.

“This is a very difficult issue because we’d be cutting programs or raising taxes, either of which are difficult political things to do in an election year,” Garamendi said.

But Klehs said the greater risk would be in waiting. “I think certain policy makers will be perhaps a little more exposed if they have to go out to their constituents and explain why they were unable to provide tax relief in the state and why they weren’t able to close major loopholes,” he said.

Balancing Act

One tax-conformity plan that is getting relatively little notice is a proposal unveiled last month by Assembly Ways and Means Committee Chairman John Vasconcellos (D-Santa Clara) to raise $1 billion for education and health while actually decreasing the overall tax bill for Californians. He would do that by balancing a 30%-to-33% increase in state corporate and personal income taxes with a two-cent reduction in the sales tax.

Harris noted that such a bill would require a two-thirds vote of both houses and would almost certainly draw a gubernatorial veto. “Unless you’ve got a consensus, that bill has got a problem,” Harris said.

In an interview, Fred Main, lobbyist for the California Chamber of Commerce, said he sees enthusiasm waning for any tax-conformity plan because of a growing suspicion among politicians that “conformity may not be that popular.”

Main cited a poll conducted two weeks ago by Teichner Associates that found that only 9% of registered voters believe that federal tax reform will benefit them. A full 39% said they believe that it will be harmful to their interests.