Tax Rebate--It’s Now a Question of When and How

With the question answered--and the answer is yes--of whether there will or won’t be a tax rebate, state legislators and Gov. George Deukmejian have turned their attention to what form the rebate will take and when taxpayers can expect to see the money.

Democrats and Republicans in recent days have expressed deep divisions over the issue, an indication that the matter will not be quickly decided. It will be months at least, and conceivably years, before taxpayers are reimbursed.

Several ballot initiative campaigns are being organized that could put the rebate issue--and a larger question of whether to amend the state spending limit--before voters in the June, 1988, election.

And a long battle in the Legislature is expected beforehand.

Tough Question

Both sides view the spending-limit question as tougher to resolve than deciding how to distribute the $1.1-billion budget surplus from the 1986-87 fiscal year, which ended Tuesday.

The overriding concern is what to do about the 1979 voter-approved amendment to the state Constitution that set a limit on government spending and dictated that any surplus revenues over that limit be returned to taxpayers.

Democrats have a hard time swallowing the idea that the law requires the Legislature to send the money back to taxpayers at a time when the state faces numerous pressing financial needs.

They argue that money for the rebate, an average of about $50 per taxpayer, would be better used to finance school programs, undertake massive road repairs, beef up research and treatment programs to combat AIDS and build and finance new prisons.

Republicans, on the other hand, believe the spending limit is doing just what voters set out to do in 1979: Hold government spending to a formula tied to the growth of inflation and population, and require a return of surplus revenues to taxpayers.

Both sides, at this point, are testing each other. This is the first year since enactment of the limit, known widely as the Gann Limit after its author, anti-tax crusader Paul Gann, that state government spending has hit the ceiling and generated a surplus.

Unknown Area

Lawmakers are on unfamiliar terrain.

“You have a lot of thirst out there,” said Senate Majority Leader Barry Keene (D-Benicia), referring to the need to build up government programs. “Public services are being cut, school programs are being cut. You have a lot of water out there to relieve that thirst in the form of the surplus.

“But there is a wall separating the two, called Gann. As the thirst builds and as the water builds, the question will be whether the wall survives.”

Keene, California Supt. of Public Instruction Bill Honig and others would love to knock the wall down by amending, if not repealing, Article XIIIB of the Constitution.

Honig, a political independent who is closely allied with Democrats on the rebate issue, said he finds it intolerable that the Legislature is forced to rebate $1.1 billion to taxpayers at a time when many school districts can’t purchase new textbooks or pay teachers adequate salaries.

Honig is working with a statewide group, called California Movement for Education Reform, on a June ballot initiative to amend the spending limit. The proposal basically would change the inflation index used to establish the limit in a way that would give government expenditures more room to grow.

“It’s obvious that the only recourse for those of us concerned about the future of California’s education is to take our case to the people,” Honig said.

But Republicans, led by Deukmejian, are dedicated to keeping the spending limit intact.

Deukmejian said he will fight changes being proposed by Honig and others in the limit.

Governor’s Position

“I think the people had very good reason for adopting Proposition 4. That’s a very reasonable limit. . . . The reason they did it was because of unbridled spending in the past. We have an obligation to do everything we can to try and make that proposition work,” Deukmejian told reporters Wednesday night.

A problem facing lawmakers is that the spending-limit law is ambiguous on how the rebate will be made. The law says only that the money “be returned by a revision of tax rates or fee schedules within the next two subsequent years.”

Deukmejian initially anticipated a rebate of $700 million, part of a $1.1-billion surplus.

But, because Republicans and Democrats could not reach agreement on his rebate legislation, which would have given the Legislature the authority to spend $400 million of the surplus in a complicated bookkeeping maneuver, the amount set aside for the rebate is now the full $1.1 billion.

The governor’s initial proposal, based on the $700-million figure, was for a 10% income tax credit up to a maximum of $95 for individuals and $190 for couples filing joint returns.

With the surplus ballooning to $1.1 billion plus interest, Republicans now anticipate a 15% income tax credit with a pay-out of $160 for individuals and $320 for couples.

Republicans, after watching Democrats stonewall the governor’s proposal, are preparing an initiative campaign aimed for the June, 1988, ballot that would compete with the one Honig supports.

Tells of Distrust

“We can’t trust (Democrats) to give it back to the people,” said Assembly GOP Leader Pat Nolan of Glendale, expressing the prevailing Republican opinion. “They will try every ruse, artifice, any bending of the law to be able to spend money. They’ve never met a program they didn’t think needed more funding.”

Under the Republican proposal, last year’s surplus and all future surpluses would be returned to taxpayers. As a concession to Democrats, the proposal would give taxpayers the choice of receiving the rebate or giving the money back to the state treasury to finance programs.

Democrats in the Assembly, meanwhile, are putting together their own rebate proposals, using the sales tax as the mechanism to send the money back to taxpayers.

Majority party lawmakers view the Republican plan as seriously flawed because only taxpayers who paid state income tax would share in the rebate. Under the governor’s plan, those who pay no income tax, such as senior citizens on Social Security and low-income workers, or people with large deductions would receive none of the rebate or a very small amount.

The Democrats view a sales tax rebate as a much fairer way to go. Several proposals are being fashioned.

Sales Tax Reduction

Assemblyman Richard Katz (D-Sepulveda) and Assembly Speaker Willie Brown (D-San Francisco) are proposing legislation that would reduce the 6% sales tax to 3% during the months of November and December. It would also exempt schools, cities, counties, special districts and the state from paying a sales tax for one year. The exemption is a way to technically comply with the law, but also provide additional aid to government agencies.

Deukmejian so far opposes the sales tax rebate, but said he is willing to approach it with an open mind and is waiting before he joins the GOP initiative campaign.

“I would hope that perhaps some agreement could be reached this summer but, if not, we certainly have not ruled out the possibility of joining in on an initiative in order to have it on the ballot so that there would be in effect a direct vote on it,” Deukmejian said.