State’s Fiscal Crisis Means Tax Breaks May Get the Knife : Budget: Lawmakers look to long-protected loopholes for revenue as deficit approaches $6 billion.

Year after year, as Gov. George Deukmejian and the Legislature grappled with one budget crunch after another, dozens of health, education and welfare programs came under the knife. But no matter how bad things got, one area of potential revenue that went largely untapped was a long list of tax breaks, now amounting to about $16 billion a year.

That may be about to change.

With the state facing a potential deficit of $800 million in the current year and a shortfall of $5 billion to $6 billion in the upcoming budget year, legislative tax-writing committees are zeroing in on these time-honored sacred cows of the Legislature as a likely place to turn for much-needed funds.

A growing group of state officials view closing loopholes and ending tax breaks as the best alternative to another round of deeper and more painful budget cuts or, going the opposite direction, increasing sales or income taxes.

“There is no need to cut services and there is no need for a general tax raise on the public, either on the income tax or the sales tax,” said Sen. Daniel E. Boatwright (D-Concord), chairman of the Senate Business and Professions Committee, who has introduced a half dozen bills to repeal various loopholes and exemptions.

“There are billions of dollars of loopholes, which means there are billions of dollars that could be collected from people who are getting services and goods in California and who are paying no taxes,” Boatwright said.

Some of the most widely discussed loopholes and exemptions are the sales tax exemptions on candy, newspapers, bottled water, custom computer programs and leases of motion pictures, along with tax exemptions given to major airlines and shipping companies for jet and diesel fuel.

Tax committees in both the Senate and Assembly recently have produced reports listing more than 60 possibilities for tax increases, with the concentration on loopholes and tax breaks.

The reports suggest expanding the sales tax base to include services as well as goods, including janitorial, parking and security services; placing a cap on home mortgage interest deductions at $50,000; boosting taxes on wine and distilled spirits, and raising the top personal income tax rate back to 11%. Top income tax rates were reduced from 11% to 9.3% in 1987. Under 1990 tax regulations, the top income bracket begins at $27,646 for single Californians and $55,292 for married people filing jointly.

Also, legislators say that with mental health and other human service programs suffering sharp cutbacks, it is becoming increasingly difficult to defend tax policies that:

* Subsidize expensive lunches of businessmen by allowing them to deduct most of the cost of the lunches from their taxable income.

* Give individuals and families with no taxable income a refund that can amount to $120 a year.

* Continue giving homeowners, who already benefited greatly by the lid clamped on property taxes by Proposition 13 in 1978, a $7,000 exemption on their property tax bill, a benefit that lowers property tax bills by an average of $70 a year for homeowners.

Efforts to close loopholes are not new. Just last summer, when lawmakers faced a $3.6-billion budget gap, proposals were trotted out to end sales tax exemptions on candy, newspapers and motion picture leases. These proposals met a fate common to similar proposals made in the past. They ran into a political buzz saw.

Girl Scouts were enlisted in the fight against a sales tax on candy--the link being the damper that the 6% to 7% tax would put on cookie sales.

The effort to end the exemption on newspapers was blocked after influential publishers called local lawmakers to protest and their papers editorialized against it.

Motion picture industry powers called lawmakers with Hollywood connections to fight off efforts requiring movie companies to tack a sales tax on motion pictures leased to distributors.

Generally, such lobbying efforts pay off, although since 1985 Deukmejian and the Legislature have eliminated about $1.3 billion in tax breaks, in part by increasing the tax on capital gains.

Senate Republican Leader Ken Maddy of Fresno, who led the unsuccessful efforts to close the loopholes last summer, said such efforts usually are defeated because while the special interests are lobbying to preserve their tax breaks, no one is fighting back.

“Every small newspaper in every legislator’s district editorialized against (the sales tax on newspapers),” Maddy said. “Candy was almost as bad. You can’t believe the number of people who suddenly got interested in that subject. They were coming out of the woodwork.”

At the same time, Maddy said, no one was really beating the drums urging him on. “I made all the special-interest groups mad at me, and there was no one, really, from the other side,” he said.

As a result, Maddy said, carrying such legislation can be politically dangerous and make it tough to persuade other lawmakers to vote or support the bills.

In the minds of budget officials, tax breaks represent budget choices just as clearly as a vote, up or down, on a school funding bill. The link between a sales tax exemption on candy and reduction in state funds to nursing homes may seem tortured to some, but lawmakers view them as much the same.

Over the last eight years, during Deukmejian’s two terms as governor, most budget trade-offs were made at the expense of human service programs, which were cut.

Taxes always were considered a last alternative by Deukmejian, although in 1983, during his first year, he suggested that a number of tax loopholes be closed, then watched as only a few of his suggestions were accepted.

Even in the Democratic-dominated Legislature, officeholders were more willing to cut social programs than roll back tax favors they granted over the years.

But there is a feeling these days that maybe cuts have gone too far.

If for no other reason, Boatwright said, lawmakers who had sided with influential interests in defeating measures to close loopholes and end tax breaks may be motivated to act by passage of Proposition 140. The Nov. 6 ballot measure put limits on the length of time lawmakers can serve in the Legislature and ended their lucrative pension system. Many linked the results of the election to the unsavory image of the Legislature held by many voters, an image borne out by public opinion polls.

“It is time that we say no to our lobbyist friends and tell them that the special interests they represent are going to have to pay their fair share of taxes,” Boatwright said.

Next time around, some tax committee members believe, the chances of prevailing over special interests could be improved by going after more tax breaks at the same time. Many longtime legislative observers believe that legislation that attempted to close loopholes failed because the bills generally went after only a few loopholes instead of many. As a result, those affected by the legislation were able to claim they were unfairly singled out for tax increases.

Andrew Meyers, chief consultant of the Assembly Revenue and Taxation Committee, said: “If you only do one or two of them you have a real problem. (But) if you propose closing 17 loopholes at the same time and everyone’s ox is being gored, then people can’t squeal that their individual oxes are being gored.”