Governor Now Backs Early Tax Changes

The Deukmejian Administration reversed itself Tuesday and agreed to support implementation this year of a bill to conform California income taxes to the overhauled federal tax system.

State Finance Director Jesse Huff told a two-house conference committee that Gov. George Deukmejian no longer believes that ordering immediate changes to the tax system would catch most taxpayers unprepared.

The Administration last February urged a go-slow approach to tax conformity, contending that it would be unfair to make major changes in tax policy after many taxpayers had already made financial decisions for the year.

‘Real Service’

In explaining the Administration’s reversal Tuesday, Huff said the governor now believes that immediate conformity with the federal tax system presents “an opportunity to provide real service to California taxpayers.”

At the same time, however, Huff warned that the governor will not automatically sign a Democratic-crafted compromise bill currently under discussion.

Huff’s statements suggest that there is broad-based sentiment in the Capitol for enactment of tax conformity legislation before the Legislature adjourns for the year on Sept. 11, although the exact form of the bill remains uncertain.

Members of the conference committee, which met for the first time Tuesday, said they expect to begin the task of drafting a compromise bill next week and hope to hammer out the last details by the first week of September.

It was clear from the number and diversity of lobbyists who packed the hearing room that there is much at stake in the outcome of the committee’s work. Realtors, manufacturers, environmentalists and advocates for the poor all pleaded for special consideration as conferees began their crucial deliberations.

In preparation for the task ahead, committee members reached agreement on several basic goals: to lower the current 11% top state tax rate, reduce the number of tax brackets and assure that the bill is “revenue neutral,” thus neither lowering nor raising the flow of revenue to the state Treasury. They also agreed to maintain the existing balance in the way individuals and corporations share the tax burden.

They conceded, however, that much like the federal tax overhaul, changes to state income taxes will be kinder to some taxpayers than to others.

“There are going to be winners and losers,” said Sen. John Garamendi (D-Walnut Grove), chairman of the Senate Revenue and Taxation Committee and author of a major tax conformity bill.

The conferees’ immediate task is to resolve the differences between Garamendi’s Senate-passed bill and an Assembly-passed measure by Democrat Johan Klehs of San Leandro. Klehs is chairman of the Assembly’s tax-writing committee.

The two Democratic-crafted bills are similar, lowering taxes for an estimated 80% of taxpayers, while preserving many tax breaks for favored groups and adding a few new tax preferences for ailing industries.

The Deukmejian Administration, however, favors a rival measure that would more closely align the federal and state tax systems, while moving toward greater simplicity through the elimination of many traditional tax breaks. The bill, authored by Assemblymen Dennis Brown (R-Signal Hill) and Elihu Harris (D-Oakland), would allow many taxpayers to file their returns on a simple, half-page-sized post card.

The bill has passed the Assembly but is bottled up in the Senate with little chance of passage this year.

Huff said the Brown-Harris bill “remains conceptually closest to the Administration’s approach” and that any final bill will have to incorporate its major provisions or risk a veto.

One of the most controversial features of the Brown-Harris bill is that, like the new federal Tax Code, it would remove the tax exemption for all unemployment benefits and for Social Security payments for couples earning more than $32,000 annually. Both programs would remain exempt from taxes under the Klehs and Garamendi bills.

Asked whether the governor favors taxing Social Security and unemployment benefits, Huff said the Administration “is aware of the political sensitivity” of the issue but favors conformity with the federal law regardless of the potential for controversy.

Huff also said the Administration has concerns about provisions in the two Democratic-supported bills that would provide hefty tax breaks to some corporations.

One provision would exempt certain small businesses from taxation and instead tax shareholders as if they were members of a partnership. Another would allow businesses to carry losses into future years, while disallowing similar “income averaging” for individuals.

Huff called the business provisions “big ticket items” and said he is doubtful that they could be paid for without a major tax loss to the state.