Democrats Float Tax Cut Alternatives

Pressure for a tax cut aimed at middle-income earners built Thursday as Republican legislators lauded Gov. Pete Wilson’s $1-billion tax reduction plan and Democratic leaders derided the proposal but left open the possibility of some sort of tax cut.

Even as Assembly Speaker Cruz Bustamante and Senate President Pro Tem Bill Lockyer declared that Wilson’s plan had virtually no support among Democrats, they were careful not to rule out some form of tax reduction.

“I’m not opposed to a middle-class tax cut, if it really is a middle-class tax cut,” said Bustamante (D-Fresno). He would be willing to present Assembly Democrats “with a more modest proposal--but this is not a modest proposal,” Bustamante said.

“I don’t know if it is fixable,” Bustamante said. “I’ll take a look at it, however, because I’m not opposed to a middle-income tax cut.”

Two prominent Democrats, whose party controls both houses of the Legislature, floated alternative tax cut possibilities although no plan has yet emerged as a consensus by the party.

In an analysis of Wilson’s proposal, Assembly Revenue and Taxation Committee Chairman Louis Caldera (D-Los Angeles) suggested pushing for a combination of tax credits for businesses to encourage more hiring and a tax cut aimed more directly at middle-income earners.

Caldera said in his memo that a tax cut could be targeted at the middle class by further adjusting various tax brackets, perhaps creating a new bracket for couples who make between $67,000 and $90,000.

“It lowers taxes for those who are most beleaguered,” Caldera said of his idea. “Those are people who benefit the least from government programs, and yet are not so well off that they’re enjoying all the benefits of the skyrocketing stock market.”

As it is, couples who earn $67,675 a year pay state income taxes at the same rate--9.3% of their taxable income--as people who make $1 million a year.

Lockyer raised the possibility of reviving proposals for an earned income tax credit, by which workers making $28,000 or less would get a tax rebate. The federal government already grants an earned income tax credit to convince people to get off welfare.

Assemblyman Antonio Villaraigosa (D-Los Angeles), the Assembly majority leader, has a proposal to create a state earned income tax credit that would cost California $924 million. A version by Sen. Hilda Solis (D-El Monte) would cost $570 million a year.

Republicans argue that since low-income workers pay little or no income taxes, they do not need a tax cut, and Wilson deemed the proposal a “nonstarter.”

Democrats argue that even though low-income families often have no income tax liability, they pay a high percentage of their earnings in payroll taxes. That debate mirrors a similar argument in Washington over federal taxes, with Democrats pushing for an expanded earned income tax credit and Republicans labeling it “welfare.”

Lockyer, however, continued to take a harder line and focused on how Wilson’s plan would slash school funding.

In the first five years of the governor’s tax cut, the state would lose “almost $5 billion in cumulative revenue,” he said. More than half that money would have been earmarked for education.

“Class size reduction, a longer school year, computerization and other essential school improvements would become difficult, if not impossible,” said Lockyer (D-Hayward).

Lockyer added that he did not feel compelled to come up with an alternative tax cut plan simply because Wilson offered one. Still, he did not rule out a tax cut that would not be of the “magnitude” of Wilson’s.

“It is impossible to have a tax cut of that magnitude without crippling public school finance,” Lockyer said. “You’re talking about a person getting $40 or $50 [in tax reductions], and the public loss for that private benefit is billions stripped out of public schools. That’s a bad deal.”

For their part, Republican lawmakers welcomed the plan by the GOP governor.

“It’s actually pretty good,” Sen. Jim Brulte (R-Rancho Cucamonga) said of Wilson’s plan. “It is a firm number. It’s a number [Wilson] is prepared to fight for, and it’s a number most Republicans will rally around.”

If anything, Republican legislators believe Wilson should be pushing for deeper tax cuts, and that his plan should take effect in 1998, rather than in 1999, as he has proposed.

“I would prefer [an income] tax rate cut, but I will accept any and all tax cut plans,” Senate GOP Leader Rob Hurtt of Garden Grove said, vowing to fight any budget plan that lacks a tax reduction.

Although Democrats control both houses, they need Republican support to win passage of a new budget. The spending plan cannot be approved unless it has support of two-thirds of the Legislature--54 in the Assembly and 27 in the Senate.

With California now 18 days past the state constitutional deadline for having a new spending plan for the 1997-98 fiscal year, Wilson and legislative leaders planned to continue to negotiate today and possibly over the weekend.

Bustamante and Lockyer asked lawmakers to remain in Sacramento, even though they had been scheduled to begin their summer recess today.

The governor is tying the tax cut to the budget talks, saying he won’t agree to a state employees pay raise--which Democrats are advocating--until he wins support for the tax plan.

In previous years, Wilson had called for an across-the-board cut of 15% in personal income tax rates. Those proposals would have given wealthy Californians greater benefits than middle-income people.

After failing for two years running to win Democratic support, he has recast the plan, and says it now is aimed at middle-income earners. A couple with two children would receive a $332-a-year tax cut if they have $80,000 in taxable income, and $159 a year if their taxable income is $60,000.

Wilson’s tax cut outlined on Wednesday would total $480 million in the 1998-99 fiscal year, and $1 billion when it would take full effect in the 1999-2000 fiscal year.

“We are firmly committed to seeing that working Californians get a tax cut,” said Sean Walsh, Wilson’s spokesman. “State government must not be a giant vacuum cleaner that sucks all of the money out of her citizens and spends it.”

In their attack, Democrats argue that Wilson’s plan would not provide enough benefit for families. To illustrate that, they homed in on how differently the plan would treat single persons and families earning roughly the median income in the state--$40,000 a year.

Individuals at that level would get a $166 tax cut--10% of their tax liability. By contrast, a couple with two children earning the same income would receive only a $60 tax cut. While that would represent a 12% reduction in the couple’s current tax bill, Democratic lawmakers focused on the lower dollar amount.

“This is the only anti-family tax cut in the nation,” said Sen. Steve Peace (D-El Cajon), a member of the Senate budget committee.