Tax Plan to Deal With Deficit Advances on Budget : Finances: Compromise calls for entertainment levy and end of deductions for second homes to help meet state's $14.3-billion shortfall.


Legislative budget negotiators announced agreement on a plan to close the state's $14.3-billion budget deficit Friday that would include a statewide entertainment tax, elimination of the interest deduction on second homes and other tax increases.

The entertainment admissions tax and other tax proposals are in a package of revenue measures designed to raise $500 million on top of the $7 billion already approved by the committee.

Before voting on the tax increase, the negotiators agreed to an additional $380 million in budget cuts and fee increases, including higher charges for adoptions and waste disposal and reductions in agriculture, tourism and a number of other programs that had been identified with former Gov. George Deukmejian.

Democrats who control the committee backed down from a demand that the top income tax rate be raised from 9.3% to 11% on the state's highest-earning taxpayers. They went along with the full 1 1/4% increase in the sales tax sought by Republican Gov. Pete Wilson, but only on the condition that the package of tax increases include other measures designed to hit the wealthy.

These included the proposal to eliminate the interest deduction for second homes, along with a recommendation to increase the tax on capital gains stemming from inherited property, and to place a cap of $750,000 on the mortgage interest write-off on personal homes.

The plan to enact an entertainment tax could prove a matter of contention. The Los Angeles City Council, facing its own large budget deficit, had proposed such a tax. But the entertainment industry opposed it and the tax was withdrawn after the City Council found additional revenue.

Details of the statewide entertainment tax, including the amount, have yet to be worked out. But it is expected to mirror the level of the sales tax and be applied to a range of activities from movies to live productions.

The elimination of deductions also could be expected to draw fire from real estate interests that were hit hard by earlier changes in federal and state tax laws.

The agreement came late in the day and was approved on a bipartisan 5-0 vote. Wilson has not consented to the deal, so it faces an uncertain future.

Steven A. Olsen, the deputy director of the Department of Finance who has been representing Wilson in the negotiations, said: "What we are going to have to do is sit down and look at the package as a whole." But Olsen applauded the committee for coming up with the plan.

Implementing the plan in its entirety would require passage of at least 40 pieces of legislation. Individual budget committees will meet over the next few weeks to draft various elements of the package into proposed laws.

The agreement came together on a motion by Sen. Frank Hill (R-Whittier).

Hill offered up a series of compromises on issues that have hung the committee up for weeks. After a bit of haggling, Democrats went along.

On the touchy question of Proposition 98 funding guarantees for public schools, Hill proposed giving schools roughly $425 million more than Wilson wants to, but about half of what Democrats wanted. Many lawmakers flatly rejected Wilson's early budget proposal on the grounds that it required suspension of Proposition 98. Hill's plan would not require suspension of the voter-approved measure.

Hill also proposed cutting basic welfare grants 4%, not the 8.8% Wilson wants, and placing a three-year freeze on cost-of-living increases. Democrats on the committee amended that to restore the full welfare grants after one year.

In another compromise, Hill proposed that the state refuse to give tax credits to renters earning about $30,000 or more. The exact income level will be determined later. Wilson had wanted to cut the renters' tax credit--now $120 a year for married couples and $60 for single people, regardless of income--by about half, and Democrats had refused.

Hill also proposed and won approval for a compromise on the state's homeless assistance program. Wilson had wanted to eliminate it, but Hill proposed redrafting the program so that the state will stop handing out cash grants for the first and last months rent to homeless people who qualify for the program.

Hill, in offering the compromise plan, said he did not know how other Republicans would react to it. He was in contact throughout the day with Senate Republican Leader Ken Maddy of Fresno. He said he decided to "float out" the plan as a last-ditch effort to get the committee to agree.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee, said it was a plan that neither Republicans nor Democrats would like. But, he declared, "It's the best we could do in a terrible situation."

Another committee member, Sen. Barry Keene (D-Benicia), the Senate majority leader, also approved the plan. Keene said he other members of the committee will insist that if other lawmakers want to eliminate any of the tax proposals, they come up with alternative measures that raise at least the same amount of money.

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