State Senate Unit Approves Tax Bill; Business Favored

The Senate Revenue and Taxation Committee, in its first attempt to overhaul California income taxes, approved tax conformity legislation Wednesday that is far more generous to business than the new federal tax codes.

The bill was put together in a four-hour session during which lawmakers suggested dozens of taxing schemes, including an unsuccessful attempt to give taxpayers a $25 credit for voting.

What emerged was a hodgepodge of proposals that provide some generous tax breaks to help tourism as well as big California industries, particularly the hard-hit high-tech firms of the Silicon Valley.

“When we started out I wanted vanilla ice cream, but (Sen. John Garamendi) brought us chocolate and what we made was pistachio,” said Republican Sen. John Seymour of Anaheim, who voted for most of the special tax breaks.

Two other competing tax conformity measures were approved by an Assembly committee last month, requiring that the measures be reconciled, most likely in an entirely new bill that would be written in a two-house conference committee, probably late this summer.

The Senate measure, by Garamendi (D-Walnut Grove), essentially would lower the top rate for individual taxpayers to 10% from the current 11%. It also would shave the number of brackets from 11 to 10.

Garamendi predicted that his bill would reduce taxes for about 80% of taxpayers, mostly in the lower- and middle-income brackets.

Generally, the bill conforms with most provisions of the overhauled federal tax code, eliminating deductions for sales taxes and non-mortgage consumer interest while adopting federal limits on charitable contributions and a long list of employee business expenses.

Residential property taxes and mortgage interest on first and second homes would remain deductible on state returns. However, unlike the federal system, interest on luxury yachts and motor homes could not be deducted.

For corporate taxpayers, the top rate would be reduced during the first two years only, from the current 9.6% to 8.5% in 1987 and 9.1% in 1988. In other ways, however, corporations would make out fairly well.

In successive bipartisan votes, the committee agreed to allow full deductions of entertainment and travel expenses that are only 80% tax-deductible under the new federal system. Sen. Seymour, whose district includes Disneyland and several major convention hotels, fought hard for that change.

Likewise, the committee agreed to allow companies to deduct 50% of their losses in bad years against profits that might be earned anytime in the next 15 years. Sen. Becky Morgan (R-Los Altos Hills), whose district includes many high-tech firms, sought the $250-million tax break on behalf of companies that she said may not stay in business without it.

There were some concessions for individual taxpayers as well. Parents would be allowed to write off 30% of child-care deductions allowed by the federal tax code. Originally, Garamendi’s bill would have allowed no more than a 20% write-off. That proposal is expected to cost the state treasury about $60 million.

The measure also would increase personal and dependent credits and retain special breaks already granted to the elderly.

There was even something added for the politicians themselves in the form of a check-off item on the new proposed tax forms allowing taxpayers to set aside $5 of their taxes to finance political campaigns in California. State law does not allow taxpayer-financing of campaigns, and Gov. George Deukmejian opposes public financing.

Garamendi, however, cautioned that Wednesday’s vote was “just one step in a long process. . . . We are a long way from a final bill.”

The exact impact of the Senate bill on most taxpayers is uncertain, since the committee hammered out its plan without the advantage of a financial analysis that is considered crucial to determining winners and losers.

However, Garamendi pledged to adjust the tax breaks so that the measure neither increases nor reduces the total amount of taxes collected by the state.

Sen. Daniel E. Boatwright (D-Concord) warned, however, that few California taxpayers will see any benefit from the new tax plan. .

“Most of the people I know took a look at the federal changes and find they owe more taxes, contrary to what the feds said they would have,” said Boatwright, who joined GOP Sen. Jim Ellis of San Diego in casting the only “no” votes on the bill.

Except for many of the business provisions added on Wednesday, Garamendi’s bill is much like legislation introduced by Assemblyman Johan Klehs (D-San Leandro), who chairs the Assembly tax-writing committee. It proposes to cut taxes for 83% of California’s taxpaying families when fully implemented and would cut the maximum state income tax rate from 11% to 9%. It would reduce the number of tax brackets to six in contrast to the 10 brackets that would be allowed under the Senate measure.

Another major Assembly tax-conformity bill by Democrat Elihu M. Harris of Oakland and Republican Dennis Brown of Signal Hill seeks much closer conformity with the federal tax codes, eliminating many credits and deductions currently enjoyed by many individual taxpayers and special interest groups. Deukmejian Administration officials have indicated that they favor that approach over the one taken by Garamendi or Klehs.