Income Tax Conformity Bills Approved

The Legislature on Thursday passed and sent to Gov. George Deukmejian major legislation to overhaul California’s income tax system and align it more closely with the revised federal tax codes, but only after strong opposition to some hefty business write-offs threatened to undo the compromise.

Approval came after the conclusion of a meeting between the Legislature’s top leaders and Deukmejian, who had told his aides that he wanted to see passage of a tax conformity bill before the session ends today.

Later, Deukmejian left little doubt that he will sign the legislation, saying that the new tax laws are “going to be very good for the taxpayers.”

“It’s going to be of assistance to them, provide for a little more simplification, (make it) a little easier to compute their taxes and . . . provide more equity,” the governor said.

In light of the legislation’s bipartisan support, the bitterness of the floor fight--particularly in the Senate--was largely unexpected.

The tax conformity legislation--divided into two bills--was sent by the Senate to the Assembly on votes of 23 to 10 for the personal income tax provisions and 23 to 12 for the provisions revising the bank and corporate tax system.

Later, the Assembly passed the personal tax bill on a 60-13 vote and the corporation tax overhaul by 49 to 21.

“This bill does something not seen in California taxes ever,” said Sen. John Garamendi (D-Walnut Grove), who helped write the final compromise legislation. “We are achieving simplicity and broad-based tax relief by closing numerous loopholes.”

Garamendi and Assemblyman Johan Klehs (D-San Leandro) emphasized that the legislation would reduce taxes for 71% of California income tax filers without raising or lowering the flow of cash to the state. But critics zeroed in on the business tax breaks and criticized the tax proposal alternately for being too generous, too stingy, for conforming too much with the federal system and for conforming too little.

And both sides predicted that there will be thousands of irate taxpayers by next April’s tax deadline, regardless of what happens.

“This is a tax shift and shaft bill,” said Sen. John Seymour (R-Anaheim), who described the legislation as riddled with exceptions to the federal law and too hard on small investors.

Could Be ‘Total Chaos’

Garamendi, acknowledging that even he has some reservations about the legislation, warned that “there will be total chaos” next spring if the Legislature fails to act and California taxpayers suddenly find the state system “is in a different world” from the revised federal codes.

“There are some things in this bill I don’t like either,” Garamendi told his colleagues, “but on balance, it is a very good bill.”

By eliminating many deductions, curbing others and using the savings to reduce tax rates, the legislation is supposed to cut taxes for families with adjusted gross incomes of $50,000 and less, while raising them for those earning more than $100,000. Taxpayers in the middle may see slight increases or decreases depending upon the kinds of deductions and credits they had previously used to shelter their income.

Although earlier projections were that as many as 353,000 low-income families would be eliminated from the tax rolls, a review of the figures prompted tax consultants to drop their estimates to 278,000 families. Under the legislation, individuals with incomes of less than $9,180 or couples with one child earning no more than $21,410 would not be subject to any state income tax.

General Conformity

The legislation would conform with the federal law in eliminating deductions on sales taxes and local income taxes while phasing out write-offs for interest on credit cards and consumer loans.

Mortgage-interest deductions for first and second homes would be retained and income from Social Security and unemployment compensation would remain untaxed.

Some lawmakers in both houses were critical of the fact that high-income taxpayers would see their taxes rise.

But the strongest criticism was reserved for the business provisions, which would provide special breaks for small, closely held corporations and allow others to write off losses over a long period of time, even though a comparable provision for individuals--income averaging--was abolished.

Provision Added

Much of that opposition was directed at a provision that would allow corporations that had already claimed losses in 1985 and 1986 to write them off once again over a three-year period beginning this year. That provision was added to the legislation specifically for the high-tech industries of the Silicon Valley, which experienced major financial problems in those two years.

The biggest challenge to that tax break came from lawmakers who represent districts that have oil drilling and refining operations. A last-minute revision of the corporate tax plan robbed the oil industry of a major tax break but left the high-tech provision untouched.

Sen. Daniel E. Boatwright (D-Concord) called the break for high-tech companies “a gift of public funds” and argued that to do so would be unconstitutional. “We are giving thousands of tax breaks to certain industries and that amounts to hundreds of millions of dollars,” said Boatwright, who added that the provisions of the personal income tax bill would raise taxes for nearly a third of individuals.”

He was joined by Sen. Don Rogers (R-Bakersfield), who represents another major oil-producing area, in decrying the legislation as likely to hurt more people than it helps. “This has been done in such a short time that it’s impossible for the general public to have any remote idea about what is being done to them,” Rogers charged.

However, Republican Sen. Becky Morgan, a member of the tax-writing conference committee whose Los Altos Hills district encompasses much of the Silicon Valley, defended the legislation as meeting goals outlined by Deukmejian.

Morgan also said the legislation was crafted so that individuals would not subsidize corporate tax breaks and vice versa. And she warned that the legislation offers a “window of opportunity” to revise tax codes that is unlikely to reopen next year.

Adjournment Nearing

Although tax conformity legislation has been under discussion at the Capitol for nearly 10 months, the final agreement was reached after only two weeks of hearings and the bills were being rushed to the floors of each house to beat today’s scheduled adjournment.

As a result, there remains a good deal of concern over whether the legislation will do exactly what it is meant to do. Every member of the conference committee, which agreed on the bill only three days ago, expressed reservations about the figures being provided by the Franchise Tax Board.

If the numbers turn out to be inaccurate, lawmakers could find themselves facing either a big surplus or an equal-sized deficit during next year’s election season.

Sen. Quentin Kopp of San Francisco voiced those fears when he pointedly told his colleagues during the floor debate that “we’re just guessing.”