Lockyer Proposes Lower Capital Gains Tax

A day after the state budget was signed, the political jousting continued Tuesday when state Senate President Pro Tem Bill Lockyer issued a surprise call for a reduction in the state capital gains tax.

Lockyer (D-Hayward) said in a statement that he will ask legislators to adopt his plan immediately after they return from a brief vacation next Monday.

The cut--intended to mirror a federal reduction signed by President Clinton on Aug. 6--would be limited to capital gains transactions such as home sales between last May 7 and Dec. 31.

“This is tax relief that would literally hit home with middle-class taxpayers but without harming public education,” Lockyer said. “Many taxpayers who have been waiting to sell their property in fear of losing their hard-earned dollars to high taxes will welcome the break. I look forward to making the tax cut permanent in the coming years.”

Lockyer said he hoped the Legislature will consider a “broad spectrum of tax relief proposals” next year. At that time, he suggested that the Legislature might consider an extension of his capital gains tax cut proposal or a similar relief package that accomplishes similar goals.

His legislation (SB5) would exclude from taxation the first $250,000 of capital gains earned by single taxpayers and the first $500,000 of capital gains earned by a couple. The bill would also eliminate the “rollover” in current law that allows home sellers to avoid taxation if they buy another, more expensive home within two years.

The news of a tax cut plan from Lockyer quickly raised eyebrows in the state Capitol. Lockyer’s resistance this summer to a tax cut proposal from Gov. Pete Wilson was cited as the chief reason that budget talks between the governor and Democrats broke down.

That stalemate forced both sides to scuttle their top budget priorities and, instead, agree to pay off a $1.36-billion debt. The collapse cleared the way for Wilson to sign a compromise state budget Monday, seven weeks after the new fiscal year began.

On Tuesday, the Wilson administration’s reaction to the Lockyer proposal was part enthusiasm and part sarcasm.

“It’s nice to see that some people are getting religion on middle-class tax cuts,” said Sean Walsh, press secretary for the governor. “We have been calling for a capital gains tax cut for years.”

Walsh said the governor would hold his opinion on Lockyer’s specific proposal until he has time to review it. But he said the governor will give the plan serious consideration and possibly his support.

Lockyer was looking for bipartisan cooperation on the plan since he signed up Sen. John Lewis (R-Orange) to be a co-author of the plan.

Walsh said even if Wilson endorsed the capital gains tax cut, that would not satisfy his interest in a personal income tax cut also. This summer, Wilson shook up the budget negotiations by insisting in July that legislators adopt a plan that would have granted personal income tax cuts ranging from 4% to 15% with the most significant cuts targeted to those couples earning $60,000 to $80,000 annually.

Lockyer and Democratic leaders rejected the proposal because they said the loss of revenue to the state would require unacceptable cuts in education funding.

This time, Lockyer said his time-limited tax cut plan would cause only a modest reduction in revenues of about $25 million in the current fiscal year.