Bursting Coffers Make State Tax Relief Likely

As estimates of the coming state budget surplus swell to record levels, some form of tax relief appears likely for most Californians.

A better picture will emerge Monday, when Gov. Gray Davis releases his revised budget proposal. Davis is expected to announce limited tax rebates--”a check in every taxpayer’s pocket,” said one administration official.

But Davis is not the only player. With budget surplus projections surging past $13 billion, the debate over tax cuts in Sacramento has become one of “How much?” and “Who gets it?” Perhaps an even more important issue is how the tax cuts will be delivered.

“Absolutely there is going to be some tax relief. Absolutely,” said Assembly Speaker Bob Hertzberg (D-Sherman Oaks) Wednesday.

Hertzberg said he favors using the surplus for debt retirement, infrastructure repair, tax credits for housing and health insurance for the working poor.

“I’m a little concerned that we are only going to see these dollars once,” Hertzberg said. “A great deal of the money is coming from capital gains and we may never see it again. This is a great economy we are in and I want to make sure that we don’t screw it up.”

Analyses of burgeoning state revenues show that most of the growth comes in the form of capital gains on stock transactions, particularly in high technology stocks, and income taxes on stock options.

State Republicans, meanwhile, lean toward more permanent tax cuts.

“This is the fourth year in a row of huge multibillion-dollar surpluses,” said Jim Brulte (R-Rancho Cucamonga), leader of the Senate’s minority Republicans. “We believe that tax reduction has to be a component of any budget process.”

For months, California Senate Republicans have been pushing tax relief proposals that would raise the dependent credit on state taxes to $500, the same as the federal level; reduce tuition on University of California and California State University campuses; and accelerate cuts in the state car tax.

On Wednesday, state Controller Kathleen Connell, drawing on recommendations from a panel of prominent business leaders, weighed in with a comprehensive proposal to cut state taxes by $4 billion.

Key elements of the Connell plan include elimination of taxes for those with incomes below $25,500; raising state income tax brackets by 10% across the board and granting one-time income tax credits to middle-class Californians.

“I personally think the middle class is under siege in California,” Connell said. “We need to find a way to give some of the money back.”

Connell said 2 million people would be removed from the tax rolls under the $25,500 limit. However, a statistical analysis conducted by her office showed that almost all who would benefit--1.9 million--are young, single adults just entering the workplace.

Most poor families at that in come level are already excluded from taxes because of credits they receive for each dependent.

The controller, who is a prospective candidate for Los Angeles mayor, also proposed a series of business tax cuts worth about $600 million.

Connell’s proposals carry little weight with the governor, with whom she has a strained relationship, or in the Legislature, where members have their own ideas about what should be done with the budget windfall. In the capital, her announcements were widely viewed as an attempt to upstage the governor.

While praising some aspects of the Connell proposals, Brulte suggested they would find more resistance among Democrats. “Her problem isn’t going to be with Republicans; it’s going to be with her own party,” Brulte told Associated Press.

Connell admitted that one of her recommendations, reducing the top income tax rate from 9.3% to 8.84%, the same as the top rate for business taxes, has little chance of succeeding.

“I’m just hoping that these recommendations set a framework for discussion,” she said, “at the very least they can be the basis for serious tax relief discussions.”