State Income Tax Overhaul Accord Near

After meeting daily for nearly two weeks, Senate and Assembly negotiators are nearing agreement on a major overhaul of state income taxes aimed at providing substantial relief for most middle- and low-income taxpayers.

At the same time, the tax-writing conference committee appears ready to grant to some corporations and closely held businesses hefty new tax breaks that they had sought unsuccessfully from the state for nearly 30 years.

These provisions, particularly generous to the hard-pressed electronics industry of the Silicon Valley, would be financed by a sharp increase in the minimum tax charged yearly to all corporations and partnerships.

Hope for Agreement

The six members of the two-house conference committee hope to reach final agreement by today on a comprehensive plan to align state income taxes with last year’s sweeping revision of the federal tax codes. The full Assembly and Senate would then have only a week to consider the complex tax measure before adjourning for the year on Sept. 11.

Some lawmakers already have expressed displeasure at the emerging compromise and large business groups, including the California Chamber of Commerce, have threatened to lobby for its defeat if the final plan does not contain enough of what they are seeking.

Should the Legislature adjourn without a bill, Californians would face two vastly different tax systems next April when the time comes to file state and federal returns.

For individuals, a leading proposal under consideration by the committee would reduce state income taxes for 74% of those who file returns. And it would completely remove 364,000 families from the tax rolls.

That would be made possible by dropping the top tax rate to 9.6%from the current 11%, by shrinking the number of tax brackets from 11 to six and by small increases in the standard deduction and personal exemptions that are available to all taxpayers.

A last-minute demand Thursday night by Deukmejian administration officials to lower the top tax rate to 9.3% threatened to delay action on an agreement. If adopted, the administration’s plan would be less generous to most taxpayers, reducing taxes for 72% of those filing, while increasing taxes for the remaining 28%.

The administration’s plan would be more generous to wealthier individuals--those earning more than $100,000 annually--while granting less tax relief to people of lesser income.

Under the committee’s original proposal, most families with adjusted gross incomes of $100,000 or less would see their tax burdens fall.

The largest reductions, ranging from 44% to 69%, would go to those earning $20,000 or less. Those in the $20,000 to $30,000 income category would have their taxes cut by an average of 18%, while those earning $30,000 to $50,000 would see their taxes fall by 11%. The smallest decrease, 1%, would go to taxpayers earning $50,000 to $100,000 annually.

Proposal’s Losers

The proposal also has its losers, mainly those individuals who in the past have been able to shelter nearly all their income by combining various deductions and credits that would be wiped out by the tax overhaul. With the application of a new alternative minimum tax, these filers who had been able to shelter all but about $10,000 of income would be in for a whopping 45% tax increase.

Other high-income individuals earning more than $100,000 a year could expect to see their taxes rise by 3% to 10%.

The committee’s proposal is the result of a delicate balancing act.

Republican Gov. George Deukmejian and many GOP lawmakers have been pressing for almost complete conformity with the federal income tax system. That would require eliminating a variety of popular deductions and credits in exchange for reducing the overall tax rates. But a majority of Democrats, who control the conference committee and the Legislature, have been largely unwilling to let go of those special tax provisions even if they would allow bigger reductions in rates for all taxpayers.

Middle Ground

With pressures building on both sides, the committee has chosen a middle ground, proposing to scrap most of the deductions targeted in the federal tax revision but substituting tax credits for many individuals who would be affected.

Like the new federal tax law, the committee’s tentative proposal would scrap deductions for sales taxes and consumer interest and limit deductions for medical bills, moving costs, employee business expenses and individual retirement accounts.

Mortgage interest deductions for first and second homes as well as for qualifying motor homes and boats would be preserved.

Unlike the federal law, Social Security and unemployment payments would remain untaxed.

For corporations, the conference committee appears to be in general agreement on providing several large tax breaks that have been resisted by state lawmakers in recent years even though they have been part of the federal tax law since the mid-1950s.

Lobbied for Provision

Land developers, major wineries and other closely held companies have lobbied for a provision that would allow them to file as “subchapter s” firms. The provision, which has drawn strong committee support, would limit their corporate tax liability while passing losses and profits directly to stockholders.

Another provision favored by most of the tax-writing committee members would allow all corporations to write off their operating losses over a 15-year period, a special break not given to individuals and estimated to cost the state nearly $1 billion over the next four years.

The most controversial of the business tax breaks would allow financially faltering corporations--particularly the hard-hit semiconductor firms of the Silicon Valley--to retroactively write off $520 million in losses suffered by the industry in 1985 and 1986.

Double the Fee

Paying for those tax breaks will fall hardest on small, fledgling corporations that are having problems turning a profit. The committee has tentatively agreed to at least double the $200 yearly fee charged now to all corporations and to extend that fee to limited partnerships as well.

Sen. John Garamendi (D-Walnut Grove), who co-chairs the conference committee, strongly supports adding tax breaks for corporations but acknowledged that the proposals amount to “gimmies in a very big way.” He noted, however, that the only way to forge an acceptable compromise in the short time that remains is to give a little to everyone.

“Everything has flaws,” he said. “Nothing will make everyone happy.”

But Assemblyman Dennis Brown (R-Signal Hill), the committee’s staunchest proponent of full conformity with the federal laws, surprised his colleagues by describing the proposal as “a piece of trash.”