State Senate OKs Budget, Tax Cut

The state Senate approved California’s $100-billion budget Thursday after a late-night switch that scrapped a $125-per-child tax cut in favor of a small income tax cut.

Acting at the behest of Gov. Gray Davis, lawmakers pared the state income tax rate by 0.55% and created a new state child-care credit.

Davis’ plan lowers the top income tax bracket to 9.25%, from 9.3%, and would save taxpayers--mostly in upper income brackets--about $300 million a year. The cut would save a family of four with an income of $50,000 about $15 annually. The budget also includes a separate one-time tax rebate.

The Republican plan to include the $125-per-child reduction in the $2.7-billion tax cut package had Democratic support. But Davis pushed for the small cut in the state income tax rate instead, as well as the child-care credit, which would save $200 million for people earning less than $100,000 a year. The bulk of those benefits are aimed at lower-income workers.

The Senate endorsed Davis’ plan in its 31-9 vote, approving the budget for the new fiscal year, which starts July 1.

A vote was pending in the Assembly, where negotiations were bedeviled by a fight over taxes.

Republicans said this year’s tax cut wasn’t deep enough and could, in effect, erase part of a 1998 reduction in the annual “car tax,” the fee Californians pay to register their vehicles.

Assembly Republican leader Scott Baugh (R-Huntington Beach) said he would be working on the issue into the night and longer if necessary.

The budget had stalled in the Assembly earlier Thursday, at least temporarily, when Republicans also protested what they viewed as a modest tax cut package, elements of Davis’ transportation plan and changes to welfare law that they say would increase welfare rolls.

Among their specific complaints, Republicans cited a provision that would permit drug felons on parole to receive some welfare benefits.

“Yeah, they need help,” said Assemblyman Rod Pacheco (R-Riverside), “but unless they help themselves the only benefit they should get is incarceration.” Still, the lower house was expected to approve the budget. It is loaded with more than $300 million in “pork” projects, ranging from parks and swimming pools to new freeway interchanges sought by individual lawmakers for their districts.

Fattened with a surplus estimated to be at least $12.8 billion, the spending plan offers major increases for schools, freeway and mass transit construction, low-income housing, health care and children’s programs.

Lawmakers used the record surplus to add money to scores of programs and create many more. There’s more money for breast and prostate cancer detection and treatment initiatives, to scrap polluting diesel engines, to care for people with AIDS and to help elderly people avoid having to enter nursing homes.

Rebates of $50 to $125

Californians would feel a direct impact this fall, when they go to their mailboxes and find checks from the state. Although the Legislature altered the form the rebates would take, the result would be the same: Californians are to receive $50 to $125.

“When there is a surplus,” Davis said Thursday, “you have to return some of the money to the people who created the surplus in the first place.”

Senate Budget Committee Chairman Steve Peace (D-El Cajon) lauded the plan he helped construct, but chided lawmakers for failing to use the state’s surplus to implement broad policy changes, among them an overhaul of the way California finances local government.

“I doubt we’ll be judged well by history,” Peace said. He added, however, that lawmakers will take up the issue later this summer.

Gone from the package is Davis’ high-profile demand that California exempt teachers from state income taxes, a step that would have saved teachers about $500 million a year but that teachers and legislators opposed.

However, in a news conference Thursday, Davis claimed victory, citing a compromise plan generated by the Legislature to grant teachers tax credits of $250 to $1,500 depending on the number of years they have been on the job. The tax benefit would extend to teachers at public schools and some at private institutions.

“This is a bold step and a clarion call across America that California values teachers,” Davis said. “No state has gone as far.”

The budget would boost the minimum salary for a beginning teacher to $34,000 from the current $32,000. Altogether, California’s spending on schools would increase to $30.6 billion from the $27.9 billion spent this year.

The school spending plan includes $1.8 billion for use by schools as local education officials see fit. The bulk of the money is expected to go to teachers’ salaries. Spending per student would rise to $6,716, an 11% increase.

In addition to schools, Davis and the Legislature included $2 billion for transportation on top of the $7 billion already earmarked for streets, highways and mass transit systems. Some Republicans balked at the plan because Davis wants to shift the largest share to urban areas such as Los Angeles and San Francisco, which are Democratic strongholds, while suburban and rural areas generally lose.

By approving the budget, the Senate met the state constitutional deadline of June 15, as it did in 1999. If the Assembly did the same by midnight, it would be the first time the Legislature met its deadline since 1986. Davis is expected to sign the budget into law in time for the July 1 start of the new fiscal year.

The Senate passed the budget with four votes more than the 27 needed in the 40-seat house for the requisite two-thirds majority. But although six Republicans voted for the budget, it lacked the bipartisan support shown for last year’s version, which passed by a 36-3 vote in the upper house.

Jim Brulte of Rancho Cucamonga, leader of the Senate’s Republicans, contended that the document was written primarily by Democrats and provides for massive growth in government. Indeed, the new budget is 18% larger than the current one.

“I didn’t run for office to grow government by 18%. I just didn’t,” Brulte said.

Tax Cut Favors Higher Incomes

As he has throughout the process, Davis took a direct role Wednesday when he urged that Senate and Assembly leaders drop the $500-million tax cut that had been approved Sunday by the Senate-Assembly budget committee.

The plan would have raised the income tax credit Californians can claim for children or other dependents to about $355 from $230. Davis’ substituted plan lowers all income tax brackets.

An analysis by the nonprofit California Budget Project shows that people earning $514,000 or more would save an average $395 a year in state taxes, while people earning $42,000 to $70,000 would save an average $7.33 a year.

“This is a targeted tax cut to the very wealthy that provides very little to the bottom 95% of California taxpayers,” said Jean Ross of the California Budget Project.

Put another way, more than half--$165 million of the annual $300 million in benefits--would go to people earning $100,000 or more, a Republican analysis of the plan shows, and $40 million would go to people earning $50,000 to $99,999.

“We favor tax reduction for the middle class; we think this is a tax reduction for the wealthy,” Brulte said.

Although the reduction primarily benefits upper-income Californians, the child-care credit, pushed by women in the Legislature and embraced by Davis, is intended to help lower-income families.

People with adjusted gross income of $10,000 pay no state income taxes. However, if they have child-care expenses of $2,400 a year, they stand to receive state refunds of $432 per child.

People earning $40,000 to $70,000 would receive credits of $240 per child, if their expenses amount to $2,400. People with adjusted gross income of more than $100,000 wouldn’t be able to claim the new state child-care credit on their 2000 income taxes.

However, Ross said many low-income people won’t benefit from the credit because they don’t use licensed child care, don’t pay federal income taxes on which the state credit would be based or are former welfare recipients who use subsidized child care and thus would not qualify.

“The package would still provide disproportionate benefits to upper-income people,” Ross said.

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Payback Time

Gov. Gray Davis’ tax plan contains $2.7 billion in permanent tax cuts and onetime rebates, with checks to arrive this fall.

Size of Rebates

Individual earnings: $150,000 and up

Rebate: $125

Individual earnings: $20,000 - $149,999

Rebate: $100

Individual earnings: Less than $20,000

Rebate: $50

*

Couples earning: $150,000 and up

Rebate: $250

Couples earning: $20,000 - $149,999

Rebate: $200

Couples earning: Less than $20,000

Rebate: $100 *

Source: Legislative analyst; Dept. of Finance