Business Favored in Senate Version of Tax Conformity

Rejecting arguments that it is moving too quickly and giving away too much to powerful business interests, the Senate on Thursday passed legislation aimed at selectively conforming California’s income tax system to the overhauled federal tax codes.

The Senate bill, approved on a vote of 22 to 7, is almost certain to end up in a two-house conference committee with two rival tax conformity bills passed last month by the Assembly.

Approval of the Senate measure paves the way for negotiating sessions later this summer. An entirely new bill will be crafted that is likely to differ substantially from those approved by each house.

“We are going to have to sort it all out and, in any case, there is a lot of work ahead of us,” said Sen. John Garamendi (D-Walnut Grove), the bill’s author and chairman of the Senate Revenue and Taxation Committee.

All three bills conform to hundreds of provisions in the new federal tax codes, including those that end deductibility for sales taxes, phase out deductions for consumer interest charges and limit write-offs for individual retirement accounts and medical expenses.

The bill would cut the maximum tax rate from 11% to 10% for individuals and from 9.6% to 8.6% for corporations.

Like the other bills, Garamendi’s promises tax cuts for about 80% of taxpayers. The reductions would be financed by the elimination of many deductions and credits, which is certain to substantially increases the tax bite for some taxpayers.

Unlike the Assembly, which has produced figures showing the income groups that would benefit or be hurt by conformity, Senate tax writers have avoided doing those calculations, in part because they do not entirely trust the figures they have been given.

“Frankly, the numbers do not balance at this time,” Garamendi conceded.

But the controversy raised on the Senate floor had more to do with what already is known about the bill.

In an effort to spur investment in California, the bill provides tax credits for research and development and allows companies to carry losses into future years, while eliminating similar income averaging for individuals. It also would allow companies to write off 100% of their entertainment expenses, rather than the 80% allowed under the federal tax laws.

Sen. Barry Keene (D-Benicia), noting that receipts from personal income taxes would grow while those for corporations would shrink during the first three years of the tax plan, questioned the direction the bill appears to be heading.

“I’m concerned about these very liberal allowances we are giving,” Keene said. “I’m not opposed to doing this but we have other areas that also require state resources, like education.”

On the other hand, Sen. Ed Davis (R-Valencia) said he favors giving bigger tax breaks to real estate investors who were hard hit by the federal tax changes. “I think it’s going to seriously hamper the rental stock in the nation,” Davis said.

Meanwhile, Sen. Jim Ellis (R-San Diego) questioned the need to do anything at all, maintaining that the federal government is likely to change its newly revised tax system, leaving California out of conformity in any event.

“One of the biggest gripes people have is taxation,” said Ellis. “But they also don’t like to change the system too often or too drastically.”

But Garamendi said that to wait would be to risk “total chaos.” Taxpayers, he said, do their planning based on the federal system and expect their state taxes to follow. If the Legislature fails to pass conformity legislation this year, he warned Ellis, “you’re going to have one large number of very mad constituents next spring when they go to make out their tax forms.”