Stage Set for a Showdown on Tax Bills : Assembly Can’t Choose, Passes 2 Rival Conformity Measures

Deeply divided over how the issue of tax conformity will play with voters back home, the Assembly on Monday narrowly passed two competing bills to partially conform California’s income tax system to the overhauled federal tax codes.

The Assembly’s inability to choose between the two measures underscores a basic problem facing tax writers in the Legislature: Everyone seems to want the “simplicity and equity” that tax conformity promises, but few want to risk a backlash should the promises prove empty.

The vote was split largely along party lines as sponsors of the two competing measures accused each other of pandering to public whims while supporting legislation that ultimately will help few taxpayers. On one side was Assemblyman Johan Klehs (D-San Leandro) and on the other were Assemblymen Elihu M. Harris (D-Oakland) and Dennis Brown (R-Signal Hill).

The political maneuvering between the two sides tied up other Assembly business for a time and both measures were able to garner a bare majority only after Speaker Pro Tem Mike Roos (D-Los Angeles) threatened to adjourn the session and send both bills to an early grave.

Ultimately, the Assembly dispatched both measures to the Senate on votes of 42 to 33 for the Democratic-supported Klehs bill and 41 to 33 for the Harris-Brown legislation, which was solidly backed by Republicans, along with nearly a dozen Democrats who voted for both bills.

‘We Must Do Something’

Assemblyman Dave Elder (D-Long Beach), although pushing his own plan for complete conformity with the federal law, best captured the Assembly’s lack of decisiveness when he called on the Assembly to vote for both bills.

“I think my (bill) represents the best alternative or I wouldn’t be carrying it,” Elder said, “but we’ve got to move these bills forward because we must do something to simplify California tax law.”

The Assembly’s action sets the stage for negotiations in a two-house conference committee that is expected to convene late this summer to draft a final bill.

In many respects, the Klehs and Harris-Brown bills, which together propose an estimated 400 changes to the state tax codes, have much in common. Both promise either the same or reduced income taxes for 80% or more of the public while conforming to many provisions of the federal tax code. Once-popular deductions for sales taxes and consumer interest would be eliminated and new limitations placed on deductions for medical bills, costs of moving and employee business spending.

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

The Harris-Brown bill, which is supported by Gov. George Deukmejian, goes the furthest toward complete conformity with the federal plan, including taxation of unemployment benefits and a portion of Social Security payments for those with yearly incomes above $32,000.

It 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. All families earning under $100,000 a year would receive some kind of tax break, with the biggest benefit--a 49% reduction--going to those in the $10,000 to $15,000 range. Those earning more than $200,000 would see their taxes increase by an estimated 13%.

The Klehs bill, by contrast, 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. Like the Harris-Brown measure, it would offer some tax relief for all families earning less than $100,000 a year. The biggest beneficiaries would be those earning from $10,000 to $20,000, whose tax burden would drop by 28%. Families earning more than $200,000 would see their taxes rise by 16%.

Klehs’ bill would preserve many popular tax check-offs for charitable and nonprofit organizations and would compensate for the loss of many popular deductions by providing a new 6% “equity credit” equal to 6% of the expenses that no longer would be deductible. Social Security and unemployment benefits would remain untaxed.

The Klehs bill also would give special tax breaks to high-tech and computer industries through research and development credits and a provision allowing losses to be carried forward 15 years.

Homing in on the traditional write-offs preserved by the Klehs measure, Harris charged that the bill “seeks to mollify everybody. . . . This says, ‘Basically it’s business as usual, we’re not going to move toward simplicity, we’re not going to take the (risk) of offending anybody.’ ”

In reply, Klehs said the Harris-Brown bill “takes California down the wrong course” by taxing Social Security and unemployment benefits and by eliminating many deductions and credits, including “enterprise zone” tax breaks aimed at encouraging development in poor areas.