Conferees Agree on Tax Overhaul : Aide Expects Governor to OK Bill Reducing Bite for Most Families

SACRAMENTO — After scrapping a big tax break for oil companies and scaling back on other business write-offs, Senate and Assembly negotiators reached agreement Tuesday on a sweeping overhaul of state income tax laws intended to reduce the tax bite for 71% of California families.

While the agreement appears to have at least lukewarm support among top Democrats and Republicans in the Legislature, the complex and delicately balanced compromise still must survive votes in both houses in the three days remaining before lawmakers adjourn for the year.

“I think this bill is going to pass on both floors by a very strong majority,” Sen. John Garamendi (D-Walnut Grove), who co-chaired the tax-writing conference committee, predicted shortly after the conferees voted 5 to 0, with one abstention, to approve the corporate provisions. The committee earlier voted unanimously in support of provisions dealing with personal income taxes.

Designed for Conformity

Together, they are designed to bring California’s income tax system into general conformity with the recently revised federal tax system while providing a much simpler tax form for the vast majority of tax filers.

A spokesman for Gov. George Deukmejian strongly indicated that the governor will support the measure but stopped short of an outright endorsement.

“The governor was pleased with the progress of the conference committee,” said Kevin Brett, Deukmejian’s press secretary. “And if the bill remains essentially the same, the governor is expected to look upon it favorably.”

Garamendi noted that although oil companies may oppose the measure because of last-minute amendments that could hike their taxes, other corporations are likely to be strong supporters because of a lowered overall tax rate and other favorable business provisions.

Republican Sen. Becky Morgan of Los Altos Hills, one of the committee’s strongest supporters of hefty tax breaks for businesses, said she was “a little disappointed” that the final outcome was less generous to corporations. But she said she supported the bill “in the spirit of compromise” and predicted that other pro-business Republicans will go along.

“Throughout the discussions, rate reductions and reduction in the number of tax brackets were the overwhelming priority of the governor and I think we have met that challenge,” Morgan said.

The Legislature’s top Democratic leaders, Assembly Speaker Willie Brown of San Francisco and Senate President Pro Tem David A. Roberti of Los Angeles, also told conference committee members that they will back the compromise.

As it emerged, the measure--which will be divided into two bills before being submitted to each house--would slash the top personal income tax rate from 11% to 9.3% beginning in the current tax year, and reduce the number of tax brackets from 11 to 6. The corporate tax rate would also fall to 9.3% from its current level of 9.6%.

Tax experts with the Franchise Tax Board have predicted that the result would be a tax reduction for 6 million California families, or 71% of all taxpayers, while 353,000 low-income individuals would be taken off the tax rolls entirely. About 2.4 million families could expect to see some tax increases, with the largest hikes going to those who previously managed to shelter nearly all of their income with deductions now being eliminated.

In general, taxes should fall for families with adjusted gross incomes of $50,000 or less and rise slightly for those earning more than $100,000. Families in the $50,000-to-$100,000 category should see little or no change in their state income taxes, although individuals will be affected differently depending upon the kinds of credits and deductions they are eligible to claim.

Although popular deductions for interest on home mortgages would be retained, write-offs on credit cards and consumer loans would be phased out in line with changes made at the federal level. There would be similar limitations on deducting employee business expenses, medical costs and business meals.

Unlike the federal system, however, Social Security and unemployment benefits would remain exempt from taxation.

For most taxpayers with relatively uncomplicated financial lives, the task of filing a state income tax return would be greatly simplified. While current law requires taxpayers to fill out a form equal in size to the federal returns, the new tax system would allow filers to transfer their taxable income from the federal forms to a line on their state returns and then add in tax credits and certain deductions.

Top state tax officials said that could mean a one-page form for the vast majority of income tax filers, with separate one-page attachments for credits taken and for so-called tax checkoffs that go to support causes ranging from preservation of endangered species to special funding for the elderly.

Although agreement was reached relatively easily on the personal income tax provisions, the compromise began to unravel late last week when state Finance Director Jesse Huff indicated that the Administration still had doubts about the plan’s effect in “redistributing” tax breaks from the wealthy to the poor.

More important, Democrats in both houses privately told conferees that they could not accept any bill that gave corporations an overall tax break. Although the committee had promised to produce a bill that neither lowered nor raised the flow of cash into state coffers, earlier versions of the compromise would have given corporations a $300-million tax break in the first three years.

Democrats like Sen. Bill Lockyer (D-Hayward), a conference committee member, suggested that that could require eventual cuts in education and health programs.

At one point Tuesday, Senate Majority Floor Leader Barry Keene of Benicia proposed balancing the ledger by giving tax breaks only to those oil companies that agreed not to undertake offshore drilling within five miles of the coast of Mendocino and Humboldt counties.

“If they are going to be treated (to tax breaks), they may be willing to give up something in return,” Keene told the conferees.

When it appeared that such a provision would imperil bipartisan agreement, the conferees instead voted to wipe out an important oil company tax provision altogether and scale back another tax break for small corporations.

As a result, the corporate provisions would drain no more than $80 million from state coffers over the next four years--an amount that Administration officials suggested could be handled within the governor’s $1-billion emergency reserve fund.

For the oil industry, the result is that firms immediately would have to stretch their write-offs of so-called intangible drilling costs--all non-material expenses associated with drilling--over the longer period of time called for in the federal tax overhaul. Conference committee members had initially agreed to provide an exception for the industry, allowing the tougher federal standards to be phased in over three years.

Oil company officials had no immediate comment on whether they would lobby against the compromise tax plan. One oil company tax expert said the loss of the tax break could spell more trouble for oil companies that already are reeling from depressed oil prices.

Meanwhile, corporations with 35 or fewer stockholders, which would be allowed to save on taxes by registering as so-called ‘S’ corporations, had their advantage trimmed somewhat by a 2.5% surtax on profits not distributed to shareholders. Even so, these corporations would be allowed to retain a tax break that would amount to more than $400 million a year.

Lenny Goldberg, a California Taxpayer Assn. lobbyist who pushed hard for ending special tax breaks for individuals and businesses, praised the final outcome as a “major improvement that will stop the hemorrhaging” of state revenues due to corporate tax breaks.

“I think the (benefits for) personal income tax payers could have been much greater,” Goldberg said. “It could have been an excellent bill but it is a bill that will still benefit the large majority of taxpayers.”

Despite all the words of support, potential problems lie ahead. Under procedures mapped out by the conference committee, lawmakers cannot amend the corporate tax provisions contained in the approved conference report. However, the personal income tax provisions will be placed into a separate bill pending on the Senate floor, which could be changed as the measure moves between the two houses later this week.

Although the complex maneuver does little to improve the bills’ chances, it will allow the committee’s two co-chairmen--Garamendi and Assemblyman Johan Klehs (D-San Leandro)--to have their names permanently attached to the corporate and personal tax revisions, respectively.

Garamendi insisted that last-minute attempts to undo the compromise are unlikely because of strong support for the current bill by the conferees, qualified backing by the governor and “because of the momentum built by this compromise.”

STATE INCOME TAX CHANGES A legislative conference committee has approved a bill to bring state income tax tables into general conformity with changes to federal tax standards. Some of the likely changes:

Estimated Change, 1986-1987, in State Income Tax Liability Taxes would decrease for an estimated 71% of families, but the effect would vary from household to household depending on how much income has previously been protected from taxation by deductions that would be eliminated by the new law.

Family income (adjusted gross)* % Change Under $10,000 -50% $10,000-$15,000 -60% $15,000-$20,000 -37% $20,000-$30,000 -15% $30,000-$50,000 -9% $50,000-$100,000 0% $100,000-$200,000 +2% Over $200,000 +7%

Tax Rates and Brackets, 1987 Based on Joint Returns Top rate drops from 11% to 9.3%, Brackets reduced from 11 to 6

Taxable Income Rate Under $7,300 1% $7,300-$17,300 2% $17,300-$27,300 4% $27,300-$37,900 6% $37,900-$47,900 8% Over $47,900 9.3%

Source: Franchise Tax Board * High-income families who sheltered nearly all their income with deductions that would be eliminated or curbed could experience a 45% tax increase in 1987.