State GOP Leaders Back Off Income Tax Cut

For the second year running, Gov. Pete Wilson and Republican legislative leaders are backing off on their insistence on an across-the-board personal income tax cut.

And in response, state Senate Democrats are relenting on a GOP-backed plan to shave bank and corporate taxes, all of which is laying the groundwork for a compromise on the state’s $63-billion state budget for the fiscal year beginning July 1.

Wilson and his main Democratic rival, Senate President Pro Tem Bill Lockyer, discussed the outlines of a deal on taxes over a lengthy dinner Wednesday night.

By Thursday, however, Wilson and Lockyer were tangling over the depth of the business tax cut during a closed-door meeting in the governor’s office.

Still, in separate news conferences after the meeting, Lockyer and Wilson both agreed that a deal on taxes appears to be in the offing.

“All the discussion recently has been on corporate tax cuts,” Lockyer said. “We know we are competing with other states for California’s business, so we have to be sensitive that our bank and corporate rate is very high.”

Although several major issues remain undecided, Republicans and Democrats said Thursday that they were optimistic that they will reach a budget accord quickly, perhaps by the constitutional deadline of July 1.

“Actually, I think we will” have a budget in place on time, said Assembly Speaker Curt Pringle (R-Garden Grove). Earlier in the week, Republican and Democratic lawmakers reached a compromise on the perennially contentious issue of welfare spending.

Republicans on the joint Senate-Assembly budget conference committee backed off on plans to impose deeper welfare cuts as Wilson had requested, while Democrats dropped some of their demands, including a push for cost-of-living increases in welfare grants.

But the most striking compromise in the works involves taxes.

For the past two years, Wilson has sought a 15% across-the-board cut in income taxes, spread over three years, plus a 15% cut in banking and corporate taxes.

Those and other tax cuts advocated by the governor would reduce state revenue more than $10 billion over the next four years. Democrats oppose the cuts, saying public schools would lose $6 billion that otherwise would go to classrooms.

After the closed-door meeting Thursday, Wilson was asked whether he was willing to forgo a personal income tax cut. “Not willing,” he replied, “but I am realistic.”

“There is evidently opposition to that, which I think is again very much mistaken,” the governor said, referring to Democratic foes of the income tax cut.

According to participants in the meeting, Wilson began by outlining his version of what he and Lockyer discussed over dinner the previous night--a business and banking tax cut that would amount to $200 million in the 1996-1997 fiscal year.

But Lockyer protested that he did not agree to such a cut, and that he could not persuade Senate Democrats to go along with one of that magnitude. Lockyer’s comments brought the meeting to an abrupt close.

Lockyer later said he believes that banking and corporate taxes can be cut by $75 million to $100 million in the 1996-1997 budget year.

Now, banks and corporations pay taxes at a 9.3% rate on net profits. Wilson proposes to cut that to 7.9%. Lockyer suggested a cut to perhaps 8.95%.

“The meeting was short and rather abrupt,” state Senate Republican Leader Rob Hurtt of Garden Grove said, describing Lockyer as “stomping out” of the meeting--a characterization that Lockyer disputed.

“Sen. Lockyer seemed like he changed whatever agreement that the governor thought he had at the dinner. Gov. Wilson was incredulous,” Hurtt said.

He acknowledged that discussion remains open on banking and corporate taxes, but apparently not on an income tax cut.

“That is significant,” Hurtt said. “I’m sorry that is the case. “

Once Wilson and legislative leaders agree on the depth of the tax cut, lawmakers can finish work on what generally is the final issue in budget talks--spending on public schools.

Democrats led by Sen. Richard Polanco (D-Los Angeles) held a news conference Thursday to denounce an Assembly Republican proposal to strip $250 million earmarked to help urban schools comply with court-imposed desegregation plans, and distribute the money to schools statewide.

The GOP plan would strike the Los Angeles Unified School District the hardest, taking $117 million from the city’s schools.

“We are very firm. We are not going to compromise,” Polanco said.