Democrats Express Optimism on Rebate : Unintended Tax Hike Forecast

SACRAMENTO —  Two Democratic bills intended to make California’s income taxes conform to the overhauled federal system would substantially increase the tax bite for individuals while granting big breaks to some businesses, according to state figures released Wednesday.

The estimates by the state Franchise Tax Board--hotly disputed by some corporate lobbyists--project that, unless major changes are made in the conformity bill, personal income taxes would rise $1.3 billion to $1.8 billion in 1987 while corporate taxes would fall anywhere from $177 million to more than $1 billion.

Meanwhile, Democratic legislative leaders, emerging from an unusually friendly luncheon meeting with Gov. George Deukmejian, voiced optimism Wednesday that a $1.1-billion tax rebate can be enacted before the Legislature adjourns next month.

Participants in the meeting hosted by the Republican governor in his office reached no conclusion, however, on what form a rebate would take--an income tax refund, as favored by Deukmejian, a sales tax cut, as favored by some Democrats, or a combination of both.

The tax conformity issue is in the hands of a two-house conference committee, which is attempting to resolve differences between the rival Democratic bills passed by each house of the Legislature.

The unexpected disclosure that both bills would boost taxes for individuals while lowering them for corporations complicates the task of coming up with a bill that neither raises nor lowers the state’s cash flow.

The conference committee faces political pressure to prevent the overall tax burden on individuals from growing.

Sen. John Garamendi (D-Walnut Grove), who chairs the conference committee, said the panel “is going to have to find a way of reducing the cost” of the business tax breaks, and he has instructed his staff to begin paring back those proposals.

“There’s no other way,” Garamendi said, “unless we want to raise someone else’s taxes.”

The two bills that form the basis for the committee’s negotiations had been aimed at either reducing taxes or maintaining them at the current level for more than 80% of individual taxpayers.

The committee’s main focus has been on corporate taxes, for which business interests have demanded that the state adopt several changes that have been part of the federal tax codes for more than 30 years.

One of those provisions, supported by major corporations, would allow losses suffered in one year to be carried forward and written off against profits in future years. High-tech firms of the Silicon Valley have been particularly supportive of this tax break because of recent heavy losses suffered by the industry.

Smaller firms support adding a provision that would allow them to register as “Subchapter S” corporations. That provision would allow businesses with 35 or fewer stockholders to avoid corporate taxes while passing their losses and profits directly to stockholders’ individual returns.

The corporate profits would then be taxed at lower personal income tax rates rather than at the corporate rates. Land developers and family held businesses, many of which are big contributors to lawmakers, strongly support the “Subchapter S” provision.

Although the tax conformity and rebate issues have been treated separately until now, some lawmakers have begun discussing the possibility of linking whatever compromises emerge in a single package so that Deukmejian could not veto one without the other.

The governor supports tax conformity but is at odds with the Legislature’s Democratic leadership over the proposed rebate.