Governor Asks for Spending Cuts and Freeze on Income Tax Brackets

Gov. George Deukmejian Friday unveiled his plan to erase a surprise tax shortfall that could hit $2 billion over two years, asking the Legislature to freeze income tax brackets, suspend a major tax break for banks and corporations and cut spending by $300 million.

The one-year freeze on personal income tax brackets would effectively eliminate a cost-of-living break for taxpayers and would bring the state about $410 million.

It would change current tax provisions that protect taxpayers from being forced into a higher bracket simply because they receive cost-of-living raises. Currently, the brackets are adjusted to accommodate cost-of-living increases.

The governor also proposed a 1-year suspension of a provision under which banks and corporations can carry forward their losses for three successive tax years. Deukmejian said this suspension would provide $140 million.

The governor’s proposal noted that pending measures in the Legislature focusing on state-federal tax conformity would give the state another $250 million. Together, the $300 million in spending cuts, the changes in personal, bank and corporation taxes and the pending tax bills would provide about $1.1 billion, the amount of the shortfall identified by the administration in the current budget year.

Deukmejian did not detail the spending cuts, but said they include trimming cost-of-living increases to welfare recipients.

Deukmejian’s proposal was announced by Jesse Huff, his Finance Department director and the governor’s top economic adviser.

Apparently expecting a potentially unfavorable reaction from the public to the complex proposal, the administration also scheduled meetings throughout the day with reporters to explain the budget-balancing plan.

On Thursday, in an address taped for television and radio broadcast, Deukmejian blamed “a miscalculation in last year’s tax reform package” for the problem and promised that this fiscal year would not end in a deficit.

The governor says his proposal “protects California’s fiscal integrity and the underlying principles of our administration: better schools, improved state services, fiscal responsibility, no general tax increases and a prosperous economy with plenty of jobs,” he said.

The address was a tactic that Deukmejian has used frequently: He makes major announcements in statements taped for television without releasing details and firm figures to reporters and without being available to answer questions.

As before, he used the expression “no general tax increase,” while leaving open the possibility of increased special taxes, tax collection speedups or increases in fees.

State fiscal experts learned last month that state income taxes fell at least $1 billion below predictions. A working group of experts convened by Deukmejian concluded that the shortfall could occur again during 1988-89, creating a potential $2-billion problem.

Deukmejian insisted that the “temporary minimal adjustments to the tax reform law” that he is proposing would not be a tax increase, but would keep “the new low tax rates” in the law passed last year.

“In fact, there’s about as much chance of me raising taxes as there is the White House throwing a book party for Don Regan,” he said, referring to President Reagan’s former chief of staff who has written a book critical of the President and his wife.

However, the unspecified adjustments he is proposing are likely to result in many California taxpayers paying more for 1988 than they did for 1987, when the tax conformity law apparently gave them an unexpected $1 billion tax cut.

Deukmejian could leave the rates intact, as he said, but increase tax collections by freezing the inflation-related adjustments in income levels subject to the various rates that are required each year. He could also propose eliminating or restricting various deductions and credits.

Deukmejian said his proposal would “scale back, by about 1%, the spending increases we had planned. Yet the budget will still be 8.5% higher than the current year budget.”

Deukmejian’s $44.3-billion budget proposal for 1988-89, introduced last January, was 5.7% higher than this year’s in all funds and 8.3% in general funds. Deukmejian did not explain how he could cut the increase by 1% and still be higher than the increase as proposed in January.

The governor gave no details of his proposed cuts, but did say that he has “protected” the $1-billion increase proposed in January for public schools. As proposed, that increase was 7.8% and would bring general fund spending for kindergarten-through-12th grade public schools to $13.6 billion in 1988-89.

“He seems to be treating us fairly, although I haven’t seen details,” said state schools chief Bill Honig. “My understanding is there will be some cuts in education.”

Honig also noted that the combination of the $1 billion unexpected tax cut this spring and the $1.1 billion tax rebate given last fall mean that schools are below the funding they could have had.

Deukmejian also said the 1988-89 state budget, which covers the fiscal year that starts July 1, will have $500 million more in tax revenues than predicted in January because of “strong economic growth.”

His statement also hinted that he will propose a reserve for 1988-89 at something less than the $1 billion on which he has insisted in almost every budget since he has been governor.

The income tax shortfall wiped out all of the $935 million reserve that Deukmejian has expected to have on June 30, the end of the current fiscal year.

His statement said he wants to “begin rebuilding our $1 billion reserve,” adding:

“Consider what happens when a family must use up its savings to handle a medical or other emergency. No one expects the savings to be completely replenished after just one paycheck.”

The income tax law passed last year partially conformed the state’s tax laws to the new federal changes. The law repealed several tax shelters and breaks and reduced the maximum personal income tax rate from 11% to 9.3%. The law was supposed to be “revenue neutral,” meaning that the state would neither gain nor lose revenue overall.