State Budget Is OKd; Governor Threatens Veto

The state Assembly on Thursday passed a $100-billion budget containing a new $1.4-billion “car tax” rebate.

Gov. Gray Davis quickly threatened a veto, calling the tax cut an “intriguing proposal” but one that has fatal flaws.

Even as the Assembly was approving the tax cut on a 75-1 vote after the Senate had passed it, Davis attacked the deal, saying it omits $100 million in business tax breaks that he wants. More important, the tax package could trigger a little-known law that might force the state to shave a quarter-cent off the sales tax rate, lowering taxes by another $1.1 billion.

Davis said the state cannot afford an added sales tax cut, given California’s overall spending plan that earmarks $30 billion for public schools, boosts transportation money by $2 billion and allows for tax reductions topping $3.2 billion spread over the next two years.

“If these two defects are cured,” Davis said in a statement, “I will sign the bill. If not, I will veto it.”

Legislative leaders said Davis’ concerns can be easily addressed. Both houses can approve bills that would reinstate the governor’s proposed business tax cuts, and alter a 1991 law that requires a sales tax cut if state coffers have reserves of more than 4% for two years running.

“No one intended this to have sales tax ramifications,” said the leader of the Assembly’s Republicans, Scott Baugh of Huntington Beach. “His concerns can be easily resolved and remedied.”

Added Assembly Speaker Bob Hertzberg (D-Sherman Oaks): “We will address it. I’m not concerned at all” about the veto threat.

The budget had stalled for a week in the Assembly, where Republicans contended that Davis’ previous tax cut package--one altered significantly by legislators Thursday--would have had the side effect of reducing car tax cuts that are to take effect in coming years.

The deal eliminates previous rebate ideas.

The new tax package, fashioned primarily by Senate leaders, emerged late Wednesday and early Thursday. Once the Senate endorsed the tax compromise on a 35-0 vote, the Assembly approved the overall budget 58 to 18.

The vote in the lower house came a week after the Senate approved the spending plan for the 2000-01 fiscal year that begins July 1. The state Constitution establishes June 15 as the deadline by which both houses must send a budget to the governor, though there are no penalties for failing to do so. The Assembly’s action gives Davis a week to sign the budget.

The tax package passed Thursday is significantly different from those offered earlier by either Davis or legislative leaders.

Gone is a dependent tax credit that would have given families another $125 per child, proposed by Senate Republican Leader Jim Brulte of Rancho Cucamonga and endorsed by several Democrats.

Gone too is Davis’ proposed 0.55% cut in the state personal income tax rate, which would have saved people $300 million a year.

Here’s what was approved:

* $195 million in a new child care credit, allowing parents to write off a portion of child care expenses up to $2,400. Davis offered this idea, first proposed by female lawmakers, last week.

* $218 million for a teacher income tax credit. The amount grows as teachers’ longevity increases. Davis has embraced this compromise on his original proposal to eliminate state income taxes for public school teachers, a $500-million idea.

* $154 million in a one-time property tax rebate for low-income elderly and disabled people. This was part of Davis’ original tax cut plan.

* $887 million in 2000-2001 in car tax cuts, growing to $1.4 billion in 2001-02--the main element agreed to Thursday.

The overall tax cut approved is less than the $2.5 billion that Davis had sought.

However, the compromise was structured so that the reduction over the next two years will add up to $3.2 billion, compared with the $3.1 billion that Davis offered. (Over four years, the Senate compromise would save Californians about $4.6 billion, compared with $4.3 billion under the governor’s proposal.)

The scheme scraps Davis’ call to cut the state income tax rate, an idea that would have primarily benefited upper-income Californians. It alters another aspect of Davis’ proposal--a rebate plan that he had embraced that would have given all taxpayers checks of between $50 and $125, twice that sum for couples.

The new tax cut plan accelerates the car tax reduction promised by Gov. Pete Wilson in 1998.

Under that measure, the reduction in the car tax, previously 2% of a vehicle’s market value, was supposed to take effect in steps until 2004, when the rate would drop by 67.5%, lowering the annual licensing fee to 0.65% of the market value of a car, truck or motorcycle.

The legislation approved Thursday, AB 858, says the rate will fall to 67.5% as of Jan. 1, 2001. But there will be a twist: Part of the cut will come in the form of rebate checks.

The owner of a car with a market value of $10,000, taxed at 2%, would have to pay $200. Because of a 35% reduction already in place, the owner would write a check to the Department of Motor Vehicles for $130.

If the registration were due on or after Jan. 1, 2001, that motorist would be entitled to a rebate check amounting to an additional 32.5% of the original $200 fee--or $65.

There also will be rebates in 2002. By 2003, the full car tax cut will be permanent.

Assemblyman Tom McClintock (R-Northridge) called the rebate scheme “convoluted.” He voted against the budget, as did several other Republicans. But Baugh hailed it as a “fantastic measure.”

“We no longer are in a position where we are giving a tax cut to the rich on the backs of the poor,” Baugh said, referring to Davis’ now-dead proposal to reduce the income tax rate.

Davis appeared pleased with the rebate plan, saying in his statement that it “puts checks in the hands of far more Californians than” past proposals that he and lawmakers had offered.

However, the plan also means that Californians who itemize their taxes and write off the cost of their vehicle license fee will end up paying slightly more federal income tax.

“We all compromised,” said Senate Budget Committee Chairman Steve Peace (D-El Cajon), who had sought to avoid a scheme that added to what Californians pay Uncle Sam. “Our job is to get a budget out on time.”

Just as the car tax cut is a legacy of the Wilson administration, so is the 1991 sales tax measure that lawmakers now must grapple with. In 1991, when California was mired in the worst recession since the Great Depression, Wilson and the Legislature approved more than $5 billion in tax hikes in an effort to close a $14-billion budget gap.

One element of that deal involved a quarter-cent increase in the sales tax rate, which adds $1.1 billion to the state treasury. A provision of that measure said that the quarter-cent hike would disappear if the state’s budget reserve amounted to 4% two years in a row. It could reappear if the reserve dipped below 4% in subsequent years.

“Given our commitment to protecting the integrity of the general fund, clearly we’ll find a way to take care of the sales tax trigger issue,” Senate President Pro Tem John Burton said Thursday.

Burton, an opponent of the car tax cut, was among a few senators who abstained Thursday from supporting the new package.

“Were it me, I would put all the money in education and mental health,” Burton said. “But I’m a bleeding heart.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

$100-Billion Budget

The state budget passed by the Legislature--and which Gov. Gray Davis threatens to veto--includes:

* $1.4 billion in “car tax” rebates

* $195 million in new child care credits

* $218 million for a teacher income tax credit

* $154 million in one-time property tax rebates for low-income elderly and disabled people.