Wilson Signs $1-Billion Cut in Income Taxes

Gov. Pete Wilson on Wednesday signed what advocates are calling the largest reduction in California personal income taxes since World War II, settling one of Sacramento’s sharpest political battles and demonstrating the state’s robust economic health.

The total package of tax cuts that legislators adopted last month with just two dissenting votes will be worth nearly $1 billion when it is fully implemented in 1999.

It will benefit homeowners who sell their primary residence, savings accounts for college-bound students and about 250,000 of the state’s small businesses. The biggest beneficiaries, however, are parents with dependent children and adults who care for sick or elderly relatives.

Starting this January, the state will nearly double the credit for taxpayers who claim dependents and, a year later, it will more than triple the same benefit to $222. Those are the changes Wilson referred to Wednesday when he dubbed it “the people’s middle-class tax cut.”

To underscore that point, Wilson’s staff turned the traditional bill-signing ceremony into an old-fashioned celebration of middle America in Temple City.

A temporary desk for the governor was placed at the end of a cul-de-sac in this 1950s-era bedroom community east of downtown Los Angeles.

Wilson arrived to the wailing siren of a vintage firetruck, the music of a blaring brass band and a line of high school cheerleaders. More than a hundred other neighborhood gawkers watched, some standing on the front lawns of Roseglen Street to wave the California state flags supplied by organizers.

“We passed a tax cut for working Californians,” Wilson triumphantly told the audience. “It will finally return some of your hard-earned taxes and it will indeed put a restraint on [government] spending. We came here to sign it and to celebrate it with you, because you are the ones it was intended to benefit.”

California’s tax structure has undergone substantial changes in recent years, making it difficult to compare personal income tax burdens today with the same assessment decades ago, officials said.

But legislative leaders and the California Taxpayers Assn. say the latest action will reduce the state’s revenue from personal income tax more than any other step since 1943, when Gov. Earl Warren dropped the maximum tax rate from 15% to 6%.

“The last time Californians gathered to do this was more than 50 years ago,” Assembly Republican Leader Bill Leonard (R-San Bernardino) said at the celebration.

Weary legislators passed the tax cut Sept. 13 as the sun was rising on a Saturday morning and the 1997 session was closing down.

Wilson said the tax cut package was the culmination of a crusade he began immediately after his reelection in 1994. But in hopes of obtaining an elusive accord, he left much of the final design to Democrats.

On Wednesday, he acknowledged the Democrats’ role in the final accord even though almost all of the legislators who attended the signing were Republican.

“Six and a half years ago, when I first took the oath of governor, I said that when we work together in Sacramento for the betterment of our state, we should all share in the credit for that accomplishment,” Wilson said. “Well, today is one of those days.”

Wilson changed his tax cut strategy this summer. After two years of promoting an across-the-board income tax cut that he insisted was necessary to spur the economy, Wilson offered a new plan that focused on the middle class. With a booming economy, it was also pitched as a way to share the windfall Sacramento has received.

Last summer, Wilson’s across-the-board tax cut plan was rejected by Democratic leaders. But just weeks later, in the final hours of the 1997 session, Democrats designed a package of their own that won the governor’s support.

“I am pleased about the type of cut that was adopted,” Senate President Pro Tem Bill Lockyer (D-Hayward) said in an interview this week. “The governor tends to prefer tax breaks for wealthier people. This agreement pushes the benefit to more middle-income taxpayers.”

The Democratic design--increasing the credit for taxpayers who claim dependents--offers a larger benefit to fewer people than Wilson had favored. The governor wanted to adjust existing tax brackets in a way that gave the greatest benefit to couples earning $60,000 to $80,000 per year.

The bill Wilson signed Wednesday will raise the current credit for taxpayers who claim a dependent from $67 now to about $120 next year, then will go to the maximum of $222.

State finance officials said the dependent care credit increase will affect about 3 million tax returns or nearly one in five of the state’s total.

The tax benefit will be effective Jan. 1 and, for most taxpayers, it will first appear in the returns they file in early 1999. State officials said some taxpayers might receive the benefit earlier by reducing the withholding from their paychecks next year by an amount equal to their anticipated savings.

The tax reduction is projected to reduce state revenue by $95 million in the current fiscal year and by $635 million when it is fully implemented in the fiscal year that begins in July 1999.

There are more than half a dozen other tax reductions in the package Wilson signed Wednesday, bringing the total value of the cuts to at least $941 million in 1999, officials estimate.

Many of the changes are intended to piggyback on tax reductions made this year in Washington. The federal budget passed in August, for example, also provides a $500 credit for every dependent child claimed by families earning $18,000 to $110,000 per year.

Like Congress, Sacramento legislators sought to help homeowners who sell their principal residence. Those who file jointly will be allowed to keep $500,000 in profit tax-free. The threshold is $250,000 for single filers.

The state law will apply to all homes sold after last May 6.

California also broadened the laws pertaining to Individual Retirement Accounts so the tax-free savings can be used by college-bound students and first-time home buyers.

Other changes will grant a tax cut for ships purchasing bunker fuel in California ports and broaden the definition of a small business, allowing more companies to operate under cheaper tax rules.

“There was certainly substantial tax relief and efforts to simplify California’s tax structure by conforming to federal law,” said Larry McCarthy, president of the California Taxpayers Assn. “It is a very significant change in direction for California.”