State Senate OKs Key Parts of Tax Increase

With only hours to go before the start of the new fiscal year, the Senate on Sunday put the finishing touches on key elements of the largest tax increase in California history, which is intended to eliminate an unprecedented $14.3-billion budget deficit.

But progress was slow and unless a final budget package is in place by today, the state will have no authority to spend money.

Hoping to reach agreement with the Assembly on a final $2 billion in new taxes requested by Gov. Pete Wilson, the Senate for a second time approved sweeping legislation reducing renters’ credits, limiting itemized deductions and imposing income tax withholding requirements on doctors, dentists and other independent business people.

The first version of the income tax bill, which would raise roughly $1.4 billion for the state next year, contained a provision, rejected by the Assembly, intended to discourage discrimination by social clubs.

On Sunday, just hours before the fiscal year deadline, the Senate deleted the amendment, which would have denied tax-exempt status to social clubs whose charters restrict membership on the basis of sex, race, religion, color, ancestry, national origin or disability.

The measure, without the discrimination provision, was approved on a 27-11 vote, reaching the two-thirds majority needed for passage with no votes to spare.

Sen. Becky Morgan (R-Los Altos Hills) complained that independent contractors would have monumental amounts of paperwork to contend with under the new withholding provisions of the law. “It is the kind of bill that will make taxpayers angrier than they already are,” she said.

But Senate President Pro Tem David A. Roberti (D-Los Angeles) countered, “The reason we have this bill is to get at people who otherwise evade taxes.”

The Assembly, which was expected to meet into the early morning hours, did not immediately take action on the tax bill.

Nearly 30 bills greeted lawmakers when the Assembly and Senate convened for the unusual Sunday session.

Meanwhile, Wilson was completing work on a list of vetoes that would trim roughly $700 million from the $56.4-billion budget sent to him last week by the Legislature.

The Republican governor, however, withheld his signature from the spending document, refusing to sign the budget bill until he received the bills raising $7.7 billion in taxes and saving billions of dollars through spending reductions, fee increases and transfers of programs from the state to counties.

In office just six months, Wilson has been faced with the monumental task of dealing with a record deficit in his first budget. The deficit was brought on by a decline in state revenues caused by the recession and soaring costs associated with running California’s prison system and providing health and welfare programs for the needy.

When they arrived at the Capitol on Sunday, some lawmakers were confronted by groups of angry state workers, who picketed both driveways leading to the Statehouse parking garage.

As part of the deficit-reduction package, Wilson is asking state employees to accept a 5% cut in pay, and he wants to cap health insurance costs and pass any additional cost increases to the workers. There also are estimates that thousands of state employees could be laid off, an action that some public employees union officials predicted would require some public workers to go on welfare.

Carrying placards asking Wilson to “Stop Union Busting,” and chanting, “Hey, Pete, go to heck, we don’t want no welfare checks,” the demonstrators shouted at legislators driving into the Capitol garage.

During a lull in the Senate proceedings, a union banner, saying “Stop Union Busting” and demanding the defeat of a bill calling for reduced benefits and pay for state employees, was hung from the dais. A Senate aide removed the banner after a couple of minutes.

“We figure they are asking state workers to shoulder at least $3 billion of the burden of closing the deficit. We are angry,” said Perry Kenny, a director of the California State Employees’ Assn., the state’s largest organized labor group.

With some of the biggest spending bills already approved and sent to Wilson, including the main budget bill, lawmakers arrived at work late in the afternoon prepared basically to tie up loose ends of the budget deal previously struck by Wilson and legislative leaders.

In addition to debating the anti-discrimination clause in the tax bill, lawmakers from both parties, prodded by lobbyists for business and professional groups, were making last-ditch efforts to pass previously rejected bids that would raise income tax rates on the state’s top earners and enact legislation that would reduce employer costs under the worker’s compensation system.

Republicans in the Assembly, pressed by business interests, were pushing for last-minute changes in legislation that would make it more difficult for injured workers to collect compensation for stress-related injuries. But Assembly Democrats, who get strong support from organized labor, met privately off the chamber floor and decided to reject the proposal.

At the same time, two influential business groups, the California Chamber of Commerce and the California Manufacturers Assn., joined Democratic lawmakers in their push for a higher tax on top earners, saying they preferred that to a 2% tax on utility bills.

Democrats had been backing a measure that would raise the top income tax rate from 9.3% to 11% for individuals earning at least $100,000 annually and couples making $200,000. But Assembly Democrats have now joined with business groups in a plan that would apply the higher rate to individuals who earn $250,000 and couples that make more than $500,000.

Wilson has objected to the higher income tax all year on the grounds that it would drive business and investment out of the state, but he appeared to have softened his stance earlier in the weekend.

In addition to passing the sweeping tax bill dealing with renters’ credits, the Senate also passed, 27 to 12, a proposal to allow counties to ask voters for another quarter-cent addition to the sales tax for public schools and community colleges.

Under terms of the legislation, sponsored by Assembly Speaker Willie Brown (D-San Francisco), school districts and community college districts within a county could form a new taxing authority and then ask the voters to approve the sales tax increase.

If a majority of voters approve, the quarter cent would be added to the 1 1/4-cent sales tax increase the Legislature already has approved and that Wilson has said he will sign.

James Lee, deputy press spokesman for Wilson, said Sunday that the governor has not agreed to the additional quarter-cent for schools.

The measure began as an attempt to help San Francisco schools out of a tight financial squeeze, but other large urban school districts have joined in pressing for approval.

If the proposal becomes law and if a majority of Los Angeles County voters approve the sales tax hike, it would yield $200 million a year for county school and community college districts, officials of those systems said. About $80 million of that would go to the Los Angeles Unified School District and the Los Angeles community colleges.

The Senate, however, scuttled one proposed fee increase that would apply to people who are “genetically handicapped”--such as Down’s syndrome children--and who receive subsidized hospital and other medical care. The bill proposed increasing fees that the families of these individuals pay. It would have raised an additional $200,000. Needing 27 votes, the bill failed, 20-9.

In other action, the Senate gave final legislative approval to a bill aimed at long-term reductions in welfare costs by toughening the law dealing with child support collections.

Times staff writers Jerry Gillam, Carl Ingram, George Skelton, William Trombley and Daniel M. Weintraub contributed to this report.