Davis Rebate Makes Sense

The prospect of a state tax rebate is the No. 1 issue facing Senate and Assembly budget writers as they begin work this week on a final $100-billion state budget. The best idea advanced so far for sharing a huge budget surplus is Gov. Gray Davis’ proposed one-time income tax rebate of $150 for individuals and $300 for couples, at a cost of $1.7 billion.

The governor also proposes sparing California’s schoolteachers from paying state income tax. It’s a bold move to make teaching jobs more attractive, but one riddled with problems. Even most teachers don’t like the tax notion, saying, correctly, “Just pay us what we’re worth.” The governor should find another way to express the value of teachers.

The state Senate has countered Davis’ plan with a $1.4-billion proposal for an annual sales tax rebate of up to $50 each for the 34 million state residents. Sponsors note it would benefit every Californian and say it would prevent the federal government from reaping a windfall of up to $300 million from an income tax rebate, on which residents would have to pay federal income taxes.

Lower-bracket Californians, who pay no federal or state income tax, would not get the Davis rebate; however, lower- and middle-income residents have received significant tax relief in the last four years.

The Assembly budget allocates $2.7 billion for tax cuts or rebates but does not specify how the money would be returned to the taxpayer--something left to final budget negotiations.

The Davis plan makes the most sense because it is similar to the rebate required by the constitutional state spending limit, which will be avoided in part by the rebate itself. Most of the surplus comes from a huge increase in income taxes, including those on capital gains. The cut should be a one-time-only program because a sudden downturn in the economy could leave the state short of the funds needed to maintain a permanent cut. Furthermore, the distribution of a sales tax refund to everyone in California would be a costly administrative headache; a simple cut in the sales tax rate would make more sense. Either would have to be suspended in a slump.

With such a massive surplus, it’s only fair to send some back to taxpayers. But the plan should be a simple and logical one. So far, Davis’ proposal comes closest to that goal.