Wilson Eases His Stand on Raising Income Tax : Budget: Governor considers an increase for the rich after business groups oppose higher utility levy.

Gov. Pete Wilson on Saturday softened his opposition to raising the income tax rate, saying for the first time that he is considering a proposal to increase taxes on the wealthiest Californians to help erase a record $14.3-billion budget deficit.

Wilson did not endorse the income tax plan, but abandoned his adamant opposition to the concept after two influential business groups--the California Chamber of Commerce and the California Manufacturers Assn.--announced their objection to a 2% tax on utility bills. The business organizations said they would prefer a higher tax on top earners.

The Republican governor, who has insisted all year that he would not support higher income taxes because they would drive businesses and investments out of the state, told reporters he would not rule out an increase in the top tax rate.

“They (business representatives) are not supporting a personal income tax increase; they’re not supporting a utility tax increase. They don’t like either one,” Wilson said. “But if they’re going to have to take some bitter medicine, they have expressed a preference (for the income tax). We haven’t determined what we are going to do.”

Democrats have been promoting a measure that would raise the top rate from 9.3% to 11% for individuals earning at least $100,000 a year and couples making $200,000. A plan being discussed by business groups would apply the higher rate to individuals who earn $250,000 and couples that make more than $500,000 a year.

The income tax proposal will be at the top of the agenda when the Assembly and Senate meet this afternoon in unusual Sunday sessions to complete action on legislation to balance a $56.4-billion budget before the 1991-1992 fiscal year begins Monday. The Legislature still must agree on additional tax increases that will raise $2 billion to balance the spending plan.

Also on the table is the proposed utility tax and a bill that would limit the renters tax credit to lower-income taxpayers, withhold income taxes from independent contractors, and place a $70,000 limit on the amount of home mortgage interest that can be deducted.

These are the major issues that remain in resolving the state’s budget crisis after months of partisan division, sharp public debate and private negotiating sessions.

Wilson and three legislative leaders--Democratic Assembly Speaker Willie Brown of San Francisco, Democratic Senate President Pro Tem David Roberti of Los Angeles, and Senate Republican Leader Ken Maddy of Fresno--reached a tentative budget-balancing deal Thursday that included a mix that was mostly sales tax increases and program reductions. Assembly Republican Leader Ross Johnson of La Habra has opposed the entire budget package, but he could not hold his caucus together.

Meeting late Friday night, the Assembly passed much of the legislation after Wilson spent the day pleading for the votes of rank-and-file lawmakers. Republican Assemblyman Robert C. Frazee of Carlsbad cast the deciding vote for a $4-billion sales tax increase. And a vote from Republican Assemblywoman Cathie Wright of Simi Valley put a $769-million vehicle license fee increase over the top.

Separate from the “soak the rich” income tax proposal, the Assembly considered--and rejected--a bill that included a collection of changes in the tax code aimed at raising $1.4 billion. And the utility tax, which would have brought in about $630 million annually, got bottled up in the Ways and Means Committee. Both proposals will be part of today’s negotiations.

The most controversial element of the tax code bill is the provision affecting independent contractors. It would require most businesses to withhold taxes from people they hire on contract, including doctors, lawyers and other professionals.

Another part of the bill that attracted opposition was a provision that would deny tax-exempt status to social clubs whose charters restrict membership on the basis of sex, race, religion, color, ancestry, national origin, or disability. But Brown, who has supported such legislation in the past, said he would not insist on keeping the anti-discrimination language in the bill.

The utility tax issue has been in trouble from the beginning. Wilson initially proposed a 6% tax on telephone, cable television and other telecommunications services. But he backed away from that plan in favor of a 2% tax on telephone, cable and water bills. A similar levy applied to natural gas and electricity would be based on the volume of energy used by each customer.

The utility tax plan proved to be the least popular way to balance the budget among voters surveyed in a recent California Poll and was similarly disliked by big business. Some large manufacturers estimated that the tax would cost them millions of dollars every year.

In testimony Friday night to the Assembly Ways and Means Committee, the Chamber of Commerce and the manufacturers group strongly opposed the utility tax. They suggested that legislators look instead at raising the top income tax rate on the wealthiest 0.5% of the population--individuals earning $250,000 a year and couples making more than $500,000. That plan would raise $828 million in the next fiscal year.

Brown said he hoped the business groups’ testimony would prompt some “rethinking” of the issue among Republicans. Democrats have backed several different “tax the rich” bills and three versions have cleared the Senate. But Republicans have repeatedly blocked the bills in the Assembly.

That could change if Wilson endorses one of the measures. The governor, who met all day with his top advisers, was customarily coy in saying how he intended to close the final $2-billion budget gap.

“The only thing that is guaranteed is that all the responses that remain are sufficiently unpleasant so that the legislators shrink from doing them,” Wilson said. “And I don’t take any joy in proposing them.”

Wilson aides said they expected the governor to sign the budget and the accompanying legislation by the close of the fiscal year at midnight tonight. Among the tax increases the Legislature passed Friday and the governor has said he would sign are the following:

* A 1.25-cent increase in the sales tax that will bring the tax to 8.25 cents on the dollar in Los Angeles, San Diego and San Francisco counties, 7.75 cents in Orange, Riverside and San Bernardino counties, and 7.25 cents in Ventura County. The sales tax will be broadened to cover candy and snack foods, newspapers, magazines, bottled water and fuel for ships and jet aircraft. Together, the changes will raise about $4 billion a year. Legislation to make the changes effective July 15 is pending in the Senate.

A half-cent of the sales tax increase is temporary and will be automatically repealed in 1992 or 1993, depending on the condition of the state treasury. At that time, however, counties and school districts statewide will have the option of asking their voters to keep the half-cent in effect to pay for jails, drug abuse programs and education. A measure passed the Assembly on Friday night that would allow Los Angeles and San Francisco counties to impose the optional sales tax increase in November if the voters approve. The bill still must clear the Senate.

* Increased vehicle license fees--which are paid annually by car owners--totaling about $770 million. The fees will go from $340 to $360 on a 2-year-old car that was purchased new for $20,000. They will rise from $6 to $24 on a 10-year-old car that was bought new for $6,000. On top of this permanent change, which takes effect with cars whose registrations are renewed beginning Aug. 1, the bill includes a 2.2% surcharge on all license fees for one year.

* Higher alcohol taxes that will bring in about $230 million a year. A legislative analysis said the measure will raise the cost of a six-pack of beer about 9 cents and add about 4 cents to the cost of a bottle of wine. The tax will take effect immediately.