Assembly Panel OKs 2 Plans for Tax Conformity

Moving cautiously but steadily toward conforming California’s income tax system with the vastly revised federal codes, the Assembly Ways and Means Committee late Wednesday approved two measures representing widely divergent viewpoints.

The bills, one by Democrat Johan Klehs of San Leandro and a bipartisan measure by Democrat Elihu Harris of Oakland and Republican Dennis Brown of Signal Hill, were sent to the Assembly floor.

The two, along with a Senate-authored tax conformity bill by John Garamendi (D-Walnut Grove), are almost certain to be placed this summer in a two-house conference committee, which will attempt to reconcile the differences and hammer out a final bill. The vote was 15 to 2 on the Klehs bill and 13 to 2 on the other measure.

Although all three measures have a long way to go, what is emerging from the hearings is a basic choice facing lawmakers: either approve a simple tax form that is largely in lock step with the federal system or allow a more complex state tax return. The latter alternative would preserve write-offs and tax benefits traditionally granted to groups ranging from the blind and elderly to supporters of endangered species.

Adding Credits

“All of us have been guilty of voting for numerous measures adding credits and deductions for everything under the sun to make the kind of system that is totally unworkable and unfair to the taxpayers,” Brown said as the committee prepared to approve both bills rather than choose between them. “I think it is very important that we move measures like this along to keep some glimmer of hope that we can do something to improve the personal income tax code in California.”

Lawmakers are having a difficult time deciding the final shape of a tax conformity bill, in part because the Legislature is focusing most of its attention on Gov. George Deukmejian’s proposed budget and his plan to rebate a $700-million surplus to taxpayers. Even lobbyists are keeping a low profile on the tax conformity battle in the belief that the initial votes are largely preliminary and may have little to do with the final outcome.

Beyond that, many lawmakers are keeping their distance from the issue because of fear that the new federal tax laws, to which the state is trying to conform, may turn out to be far less popular with voters than many had predicted.

Even Deukmejian showed a reluctance to be linked too closely to tax conformity when he announced recently that he does not want any conformity bill to take effect until the 1988 tax year, giving lawmakers plenty of time to rewrite provisions that prove unpopular or unworkable.

All three of the major tax conformity bills under consideration in the Legislature, however, would take effect this tax year. They generally conform with most major provisions of the federal law, limiting or eliminating once-popular deductions for sales taxes and consumer interest, as well as medical, moving and employee business expenses.

All would preserve mortgage interest deductions for first and second homes but limit real estate investment write-offs in line with the federal overhaul.

Of the two bills considered Wednesday by the Ways and Means Committee, the Harris-Brown measure, calling for a highly simplified tax return, goes farthest toward conformity with the federal system. Among its most controversial provisions are the taxation of unemployment benefits and a portion of Social Security payments for those with incomes above $32,000.

The bill would also repeal tax credits for the blind, deductions for political contributions and provisions allowing taxpayers to direct a portion of their taxes to charitable and nonprofit organizations, such as the California Seniors Fund and the Endangered and Rare Species Account.

“If you want to start adding back (the deductions and credits) there is no point in having conformity,” Harris told the committee in response to a barrage of criticism from affected groups.

Harris noted that 82% of taxpayers would see their taxes cut or remain the same because of lower tax rates included in his plan.

Fewer Tax Brackets

The measure would lower the top tax rate to 9.6% from the current 11% and drop the number of tax brackets to three from the current 11.

The biggest winners under the Harris-Brown measure are families earning $10,000 to $15,000 who would see their tax burden decline by an average of 49%. The biggest losers would be those earning more than $200,000 who would be forced to pay 13% more.

The Klehs bill, by contrast, preserves many of the popular tax checkoffs for charitable and nonprofit organizations and compensates for the loss of many popular deductions by providing a new “equity credit” equal to 6% of the amounts of employee business expenses, medical expenses and consumer interest that no longer will be deductible. Social Security and unemployment benefits would remain untaxed.

The bill reduces the number of tax rates from 11 to six and cuts the top rate from 11% to 9.8% in 1987 and 9.5% in 1990 and thereafter. Klehs claims that 80% of Californians would see their taxes decline.

The biggest winners under his measure would be families earning $10,000 to $20,000 whose tax burden would decline by 28%. The big losers would be families earning more than $200,000 whose taxes would increase by 16% and other wealthy individuals who use tax shelters to bring their incomes below $10,000. They would see their taxes soar by 34%.

The Garamendi bill approved last week by the Senate Committee on Revenue and Taxation has not been fully analyzed, making it impossible to determine the impact on different income groups.

COMPARING STATE TAX BILLSThe Legislature is considering three major proposals to bring California’s income tax system into conformity with the overhauled federal tax codes. Two Assembly measures by Johan Klehs (D-San Leandro) and a bill by Elihu M. Harris (D-Oakland) and Dennis Brown (R-Signal Hill) will have to be reconciled with a Senate bill by John Garamendi (D-Walnut Grove).

THE EFFECT ON TAXPAYERS

ASSEMBLY Harris/ Klehs Brown AB 53 AB 33 Percent of taxpayers facing tax increase 20% 18% Percent who pay same or less 80% 82% Number of families who pay no tax 447,184 570,890 Top tax rate (currently 11%) 9.8% in 1987 9.6% 9.5% in 1990 Number of tax brackets 6 3

SENATE Garamendi SB 555 Percent of taxpayers facing tax increase 20% Percent who pay same or less 80% Number of families who pay no tax NA Top tax rate (currently 11%) 10% Number of tax brackets 10

TAX BY INCOME GROUPS

PERCENTAGE CHANGE FROM CURRENT TAX LAW Total Family Income Klehs Harris/Brown Under $10,000 (with tax-sheltered income) +34.0% -15.0% Under $10,000 (no tax-sheltered income) -9.0% -14.0% $10,000-$15,000 -41.0% -49.0% $15,000-$20,000 -28.0% -19.0% $20,000-$30,000 -13.0% -14.0% $30,000-$50,000 -8.0% -8.0% $50,000-$100,000 -0.7% -0.2% $100,000-$200,000 +0.5% +0.1% More than $200,000 +16.0% +13.0%

Figures compare two Assembly bills; no information available on Senate bill Source: Assembly and Senate Revenue and Taxation committees