Deukmejian’s Tax Hike Plan Assailed Even by His Allies

Still unable even to find a legislative author for his $800-million tax increase plan, Gov. George Deukmejian encountered strong resistance to his proposal Wednesday as Republicans and Democrats alike criticized the package at its first committee hearing.

Members of the Senate Revenue and Taxation Committee zeroed in on what they said were flaws in the governor’s plan. And they were joined by a parade of lobbyists for business interests, normally among the Republican governor’s strongest allies, who testified against the tax legislation.

Further aggravating the governor’s fiscal problems, state Finance Director Jesse R. Huff cautioned that if Proposition 72--a measure to increase the state spending limit--is approved by voters next Tuesday, it will cost the state an additional $680 million. That would come on top of the recently discovered budget shortfall of $2.3 billion that led to the governor’s tax increase proposal.

Obviously, the estimated $680-million cost of Proposition 72 would require even steeper tax increases or deeper budget cuts than those already proposed by Deukmejian.

Taking No Position

Sen. Becky Morgan of Los Altos Hills, one of the Republican lawmakers on the tax committee who gave Deukmejian’s plan a chilly reception, said she would take no position on the governor’s proposal until after Tuesday’s election.

“If Proposition 72 passes, it’s a whole new ballgame,” Morgan said.

She noted that on Tuesday, a Senate fiscal committee approved a $45-billion version of Deukmejian’s proposed budget that is $417 million higher than one the governor produced to balance state spending. That, plus the potential $680-million cost of Proposition 72, “means you are talking about a $1-billion cut,” Morgan said.

During the hearing, the governor’s tax bill was attacked as being unfair to middle- and low-income taxpayers as well as to banks and corporations.

The tax proposal has three elements, and critics found flaws in all three.

One provision of the tax plan would raise $410 million to help finance the new budget by changing tax brackets so they will not be indexed to reflect inflation. Income tax indexing was approved by voters in 1982. Basically, it requires that tax tables be adjusted annually to prevent wage earners who receive cost-of-living increases from being bumped into higher tax brackets.

Faced with a clear legal problem but wanting to get around the 1982 initiative, Huff and his staff came up with a plan: 1987 income tax bills payable next April 15 would be indexed to reflect an inflation rate of 3.6%, but at the same time the tax brackets would be reduced by the same 3.6%, in effect nullifying the effects of indexing.

Sen. Quentin L. Kopp (I-San Francisco) told Huff the plan would make the 1982 initiative “a nullity.”

“I don’t think that anyone who voted for that ever thought the Legislature would figure out a way around it,” Kopp said.

Legislative tax experts produced charts and tables showing that the indexing plan would produce the highest percentage tax increases for low- and moderate-income Californians.

One tax committee chart showed that a married homeowner with two children earning an adjusted gross income of $32,519 would face a tax increase of $15, from $298 to $313, or 5.1%. By contrast, if the same taxpayer earned $181,222, the tax would go from $11,770 to $11,855, for an increase of $84, or 0.7%.

This bolstered Democratic arguments that Deukmejian’s plan favors wealthy taxpayers.

But Huff challenged that assumption, asserting that as it stands, the top 20% of state income earners pay about 60% of the total tax.

“California income tax remains one of the most progressive in this country,” he said.

Huff also noted that during the 1986 tax year, taxpayers got a $1.1-billion income tax rebate. He also contended that last year they got an unexpected windfall of $1.2 billion as the result of some apparent miscalculations by tax experts who drafted the sweeping overhaul of the state tax system. The way Huff sees it, taxpayers will still be ahead even if the governor’s $800-million tax package is approved.

A Bad Word

Huff repeatedly refused to call the tax proposal a tax increase , joking at one point that he would never use “the I word.”

But Sen. John Garamendi (D-Walnut Grove) repeatedly referred to the measure as “a permanent tax increase.”

He was joined by Republican Sen. John Seymour of Anaheim, who at one point said the plan called for tax “increases--and that’s what they are.”

Seymour argued that the current tax problem is due to last year’s hastily enacted tax legislation, saying that he fears that passage of another tax bill to correct the problem could cause the state “to make the same mistake again.” He called the bill “an exercise in futility.”

Measure Expected

Later, Seymour said that although he ultimately may vote for the governor’s tax plan, “I don’t know how I possibly could carry that bill.” However, he predicted that the governor would soon find a GOP lawmaker to officially author the measure.

Lobbyists representing business interests criticized the two elements of the governor’s plan that would raise business taxes. One is a proposal to conform state business tax law to changes in the federal code that went into effect last year. That would raise $250 million. The governor also would like to suspend for one year a tax break enacted last year that allows businesses to carry losses from one year into the next three years. That would raise $140 million.

Officials of the state Chamber of Commerce, the California Manufacturers Assn., the California Taxpayers Assn. and the Banker’s Assn. said the tax plan places too much of the tax increase on businesses.

The business groups believe that if the chief cause of the $2.3-billion revenue shortfall is a miscalculation of personal income tax receipts, then the bulk of the tax increase should be in the income tax. As it stands, the proposed tax increase is about equally divided between individuals and businesses.