State Tax Cut: Don’t Rush

As Republican ranks dwindle in the state Legislature, the party’s leaders have begun to emphasize pragmatism over ideology in developing programs. Still, Republicans have not abandoned their keystone of recent years: tax cuts. Senate Minority Leader Jim Brulte (R-Rancho Cucamonga) and Assembly Minority Leader Bill Campbell (R-Villa Park) this week proposed tax reductions of roughly $3.5 billion during the budget year beginning July 1.

The still-growing state surpluses make the idea tempting, but they are too volatile to use as a basis for big permanent tax cuts. Such cuts also must be balanced against pressing state needs in education, health care and restoring the fiscal health of local governments.

Democratic Gov. Gray Davis and the Legislature must keep a wary eye on the economy before endorsing tax reductions. Next year’s budget already will include some $6 billion in ongoing cuts approved in recent years, including a two-thirds reduction in the state auto registration fee. Other reasons for caution include a potential economic slowdown and possibly a need to use state resources to deal with the electric power crisis.

This caution is not lost on the GOP. About half of the party’s proposed cuts would be for one year only, including a 12-month suspension of the sales tax on gasoline. If the economy remained strong, the cut might safely be extended. If not, it could be dropped. But the plan also includes an ongoing $120 increase in the deduction for each child or other dependent claimed on income tax returns, from $235 to $355. This deduction, which has been increased in recent years, benefits the wealthy as well as average taxpayers. Other permanent reductions include a total elimination of the car tax and $265 million in business tax cuts.

Legislative Analyst Elizabeth G. Hill estimates that the state will have a $10.3-billion surplus through the 2001-2002 budget year. But the bulk of that comes from this year. Hill sees much slower growth in income and sales tax revenues in 2001-2002. She also proposes that the state retain $2.5 billion in reserve as a hedge against economic uncertainties. That is about 3% of the general fund and is considerably larger than recent reserves but nonetheless is a prudent level that should be endorsed by Davis and the Legislature.

The time to make decisions on possible tax cuts is during the summer, when fiscal experts should have a much better idea of what the future holds for California.