Finance Chief’s Remarks Slow Tax Reform

A compromise plan to overhaul state income taxes--hurriedly rewritten to satisfy Deukmejian Administration objections--faltered Friday after the governor’s finance director refused to endorse it and criticized legislative tax writers for shifting too much of the burden to the wealthy and not giving enough tax breaks to corporations.

Work on the tax bill came to an abrupt halt after the unexpected and unwelcome lecture by Finance Director Jesse Huff, just as conference committee members were congratulating each other on reaching bipartisan agreement.

And while committee members insisted that the deal had not unraveled, they acknowledged that the Administration’s stance had prompted Democratic leaders of the Senate to take another look at the compromise, delaying action until after the Labor Day weekend.

Sen. John Garamendi (D-Walnut Grove), who co-chaired the tax-writing conference committee, appeared concerned that special interests might use the delay to push for major changes in the bill, which is designed to conform state income taxes to the newly revised federal tax codes. Hoping to head that off, Garamendi issued this stern warning to the Capitol lobby corps: “If you think this is going to be rewritten, you’re wrong.

“Those who think they can cut a better deal, I wish them luck,” Garamendi told a hearing room packed with lobbyists and reporters. “They won’t do it this year and they won’t do it next year because there will be no conformity bill next year.”

Assemblyman Johan Klehs (D-San Leandro), the Assembly’s chief tax negotiator, agreed, adding: “We were working with a very tough equation and we think this is the best package we can put forward. . . . There will be no new deals. We plan on passing (the tax bill) off the floors and onto the governor’s desk.

In its latest form, the compromise bill would lower the top tax rate to 9.3% from the current 11%, reducing taxes for an estimated 71% of California families while completely removing 353,000 low-income families from the tax rolls.

Most deductions eliminated or curbed by the federal tax overhaul would be treated similarly under the state proposal, although some credits would be substituted to make up for the lost tax breaks.

The largest tax cuts would go to families with adjusted gross incomes of $20,000 or less. For them, tax payments would fall by 37% to 60%. Taxes for those earning between $20,000 and $50,000 would decline by 9% to 15%, while most of those earning $50,000 to $100,000 would receive neither a tax increase nor a decrease.

Rate for Wealthiest

Meanwhile, taxes for the wealthiest individuals--those earning more than $100,000--would rise by an average of 2% to 7%.

The real estate industry, which was hard hit by the federal tax revision, would receive special treatment with a new tax credit designed to offset the elimination of favorable capital gains treatment on the sale of rental property. The same credit would be extended to the sale of farm land.

Corporations with 35 or fewer stockholders would be given special treatment, and all corporations would be allowed to write off their losses over 15 years.

Although the bill is advertised as neither raising nor lowering the flow of cash into state coffers, in actuality the corporate provisions are expected to cost the treasury an estimated $300 million over the next four years. That could spell trouble for the measure when it goes before both houses of the Legislature.

The rewritten tax plan provides most of the individual tax relief at the lower income levels. But it is less generous to the poor and less onerous to the wealthy than a compromise that had been worked out earlier in the week. That measure, however, was rewritten late Thursday after Administration officials told the committee that the governor would not accept a tax bill unless the top tax rate was set at 9.3% or less.

Tax Cuts Scaled Back

That required scaling back the intended tax cuts for middle- and low-income individuals, with the money going to soften the blow on the wealthiest taxpayers.

While Democrats on the committee found that a bitter pill, they ultimately gave in and endorsed the plan, fearing that not to do so would certainly bring a veto and end the prospects for tax conformity in the foreseeable future. Republicans on the committee, one of whom had branded the earlier compromise package a “piece of trash,” heartily embraced the rewritten measure.

The uneasy peace was shattered, however, after Huff made a surprise visit to the committee and during a round of congratulatory remarks told members that the Administration “had concerns” that corporations were still being unfairly treated and that there was too much “redistribution” of tax breaks to low-income individuals.

“These are areas (the governor) will look at as he makes up his mind,” Huff said. “I am not committing the governor at this time.”

Visibly angered at the turn of events, Democrats on the committee recessed the hearing.

‘A Political Firestorm’

Later, Garamendi said that Huff’s remarks had prompted new reservations about the tax plan in the minds of some Senate Democrats. “This (agreement) would have been signed this morning had we not had some comments made earlier that set off a political firestorm,” Garamendi told reporters.

“We do have an agreement with the Administration; we did then and we do now. This had only to do with posturing.”

A spokesman for Gov. George Deukmejian said the governor would reserve final judgment on the plan but “is pleased with the progress made by the committee.” Representatives of some business groups that had been lobbying hard for the tax plan indicated that they too were miffed by Huff’s statements. Most said they would work hard to see that the agreement does not unravel.

“I think the conference committee members have really worked hard to get an acceptable package,” said Fred Main, lobbyist for the California Chamber of Commerce.