State May Net $600 Million From Changes in Tax Codes

California’s efforts to conform its income tax code to the revised federal system are expected to provide state coffers with more than $600 million in added revenue, primarily from corporate taxpayers, it was disclosed Wednesday.

The surprise increase in tax receipts results from several corporate tax changes enacted by Congress in December in the aftermath of the landmark 1986 bill that overhauled the federal income tax system.

Among the federal changes were repeal of a special provision for real estate companies and of deductions companies claimed for accrued employee vacation time, as well as various revisions in business accounting rules.

Effect for Three Years

The state Franchise Tax Board has not completed its analysis. But preliminary figures released to the Senate Revenue and Taxation Committee indicate that if California, as expected, fully conforms to the federal changes, the state would receive an additional $210 million to $240 million in each of the next three years.

Faced with the unexpected good news, members of the Senate tax-writing panel began scrambling Wednesday to stake out positions on the potentially divisive question of what to do with the money.

Sen. John Garamendi (D-Walnut Grove), who chairs the panel, predicted that the discussions could bring “significant changes” to the state tax code. Those changes, however, are expected to be aimed at businesses rather than individual taxpayers.

Some members of the panel want to see some of the money returned to the businesses that are being forced to pay more under the revised federal tax system. They are proposing several changes, including lower tax rates on capital gains from stock held in small businesses and larger research and development credits, a tax break targeted to California’s high tech industries.

Employee Benefits

Others, led by Garamendi, are suggesting that a major portion of the money be used to encourage business to provide benefits for their employees, including job training and language instruction.

Leading Garamendi’s list is a proposal to give $100 million in tax credits to businesses that provide child care.

The Legislature recently passed legislation by Sen. Gary Hart (D-Santa Barbara) to do much the same thing, but it was vetoed by Gov. George Deukmejian as too costly. A similar Hart bill was passed by the Senate and is awaiting a vote in the Assembly.

Hart said Deukmejian, in an Easter radio broadcast, showed signs that he is softening his opposition by urging the Legislature to provide more money for child care. “He’s acknowledged the problem for the first time in four or five years,” Hart said.

Regardless of the Legislature’s past support for such programs, there were warnings of problems ahead.

‘Rough Sledding’ Seen

Sen. Daniel E. Boatwright of Concord, a conservative Democrat, told the committee that the child care proposal and others suggested by Garamendi are likely to face “rough sledding.”

“I think these are things that are going to have to be hashed out down the road because they are controversial,” he said. “I don’t think you have the support of the other house to (pass them) or even in this house.”

The Assembly’s Democratic leadership, which is strongly supportive of spending more for child care, has been unable to push some of its programs because of an internal rebellion by a group of moderate to conservative Democrats, known as the “Gang of Five.”

Garamendi said the final tax bill will be the product of negotiations by all sides. “There is no doubt we have a long way to go with this,” he said.