Democrats Closing In on Wasteful Tax Breaks

There’s a growing realization among Democratic state politicians that they should be looking hard at “waste, fraud and abuse.” But not just wasteful spending. They’re also eyeing tax break abuse.

Sacramento dug a deep budget hole by overspending -- mostly on public services, but also on tax breaks.

There’s a government-speak name for it: “tax expenditures.”

“It’s tantamount to spending because the money’s there to be collected and it isn’t,” says Assemblyman Mark Ridley-Thomas (D-Los Angeles). He’s pushing a bill that would require the periodic review of tax breaks -- do they actually stimulate the economy, as intended? -- and the junking of those found to be obsolete and wasteful.

“Like cleaning out your closet -- throwing out old sneakers,” notes Carole Migden, a San Francisco Democrat who has attacked tax cut abuse as a member of the state Board of Equalization. A former Assembly member, she’s a cinch to be elected in November to the Senate seat being vacated by termed-out leader John Burton.

The nonpartisan legislative analyst defines tax expenditures as: “The various exclusions, exemptions, deductions, credits, preferential tax rates ... that deviate from the state’s basic tax structure and result in a reduction in revenues.”

Whatever you call it -- tax cut, incentive, loophole, expenditure -- it’s money out of one pocket and into another. Like a college kid forking out higher tuition while his uncle pays a lower car tax on a luxury SUV.

One person’s tax break can be another’s service denied. The rich yachtsman takes delivery of a new vessel in Oregon, berths it there 90 days before sailing home and avoids California’s sales and use tax. Meanwhile, poor people lose healthcare.

Assemblyman Lloyd Levine (D-Van Nuys) has a bill to close the yacht tax loophole, which also applies to RVs and other vehicles. It would save the state $35 million and local governments another $20 million, but is blocked on the Senate floor.

This isn’t all about class warfare. Why should schoolteachers be allowed a tax credit of up to $1,500? Instead, schools should merely reimburse teachers for their classroom supplies.

That tax credit costs the state $190 million a year. It was gifted by Gov. Gray Davis in boom times, to the embarrassment of teachers unions. Davis tried to take it back last year, but Republicans refused to let him because, in their narrow view, that would have amounted to a tax increase.

One of the ridiculous results of Prop. 13 -- the property tax rollback -- is that it takes only a simple majority vote to bestow a tax break, but a two-thirds vote to repeal it. That’s one reason why Sacramento still is battling a nagging $14-billion deficit.

On Davis’ watch, annual taxes were pared by $3 billion, according to the California Budget Project, a liberal think tank. Since 1997, they’ve been cut by $6 billion; since 1991 by $9 billion.

The legislative analyst has identified 200-plus tax expenditures worth about $30 billion annually. Of these, $25 billion are given through the personal income tax. The other $5 billion involve the corporation tax. In addition, there are $7 billion worth of state-controlled local sales and property tax breaks.

The analyst has suggested several options, including:

* Eliminate the mortgage interest deduction for vacation homes, saving $55 million. Assembly Budget Committee Chairman Darrell Steinberg (D-Sacramento), who has been holding hearings on tax breaks, says he’s “looking seriously” at this. “That could be $55 million for health and human services.”

* Lower the dependent exemption credit -- mainly for children -- back to where it was in 1998, saving roughly $1 billion. The credit would be reduced from $257 to $82, same as the personal exemption credit. Why are we providing tax incentives to produce children? But no legislator is touching this.

* Limit favorable tax treatment, under so-called Subchapter S, to corporations with less than $20 million in revenues. Now billion-dollar firms can cash in if they’ve got 75 or fewer shareholders. Savings: $275 million. It’s low-hanging fruit for Democrats, but no doubt deemed poisonous by Republicans.

Migden and Sen. Dede Alpert (D-Coronado), who heads the Appropriations Committee, have targeted three tax credits used by multi-state and multinational corporations. The credits, costing $200 million, involve complexities known as “double-weighting” and “water’s edge.”

An Alpert bill would end these breaks. She’ll amend it to use the savings to create California’s first earned income tax credit for the working poor. It’d be modeled after the federal program that allows low-income people to get rebates even if they don’t owe taxes.

Alpert and Migden say this would help mitigate cuts in services for the poor. But it’d also be another tax expenditure -- and questionable until Sacramento starts living within its means.

The politicians’ primary target should be narrow tax breaks that don’t help the economy and smack of unfairness.

“If we’re turning 22,000 kids away from our universities,” says state Treasurer Phil Angelides, “why aren’t we looking into all the nooks and crannies of our tax code?”

Democrats are. So should Gov. Arnold Schwarzenegger -- and root out all the waste, fraud and abuse.

George Skelton writes Mondays and Thursdays. Reach him at george.skelton@latimes.com.