State’s Growing Surplus Spurring Calls for Tax Relief

SACRAMENTO —  Despite the lack of encouragement from Gov. George Deukmejian, or perhaps because of it, bipartisan pressure is building to return a portion of the state’s budget surplus to taxpayers if it grows substantially beyond the current $1 billion.

At least six bills, sponsored by both Republican and Democratic legislators, have been introduced promising a variety of tax reductions if the budget reserve gets bigger than 3.7% of the state’s general fund.

The 3.7% figure stems from the $1-billion reserve the governor put into his spending plans for the current and upcoming budget years.

Ultimate success of the legislation is clouded by Deukmejian’s continued reluctance to say whether he will support use of a portion of the reserve for general tax relief.

Democrats suspect Deukmejian may be waiting until next year, when he could incorporate such a proposal into his reelection campaign.

Thus, the bills sponsored by Democrats are motivated as much by a desire to beat the governor to the punch as they are by what is a widespread belief by legislators from both parties that the surplus will be substantially more than $1 billion.

The fear is that a large surplus could trigger the kind of voter backlash that developed in the 1970s when the surplus was estimated at up to $5 billion. That situation helped trigger the so-called tax revolt that led to passage of the property tax-cutting measure, Proposition 13.

“I really feel Democrats ought to move forward with a tax relief bill and not play into the governor’s hands by waiting until next year,” said Assemblyman Thomas M. Hannigan (D-Fairfield), chairman of the Assembly Revenue and Taxation Committee, who recently introduced two measures that would provide a total of about $1 billion in tax relief.

Hannigan’s bills, which he calls “a starting point for discussions,” would raise some taxes but decrease others through such features as a proposed sales tax exemption for purchases of home heating fuel.

Hannigan and other bill sponsors cite estimates by the legislative analyst’s office and the Commission on State Finance that the surplus could be from $250 million to $500 million more than what the governor and Department of Finance are forecasting--and unofficial estimates that it could be even higher.

Sen. Alfred E. Alquist (D-San Jose), chairman of the Senate’s two fiscal committees, said that when the next fiscal year ends in June, 1986, “Our surplus probably will be closer to $2 billion than $1 billion.”

Alquist is sponsor of a bill that would spend $500 million of the surplus by giving tax relief to multinational corporations through repeal of the controversial unitary tax, which taxes firms on the basis of worldwide sales.

Deukmejian believes California has enough money to finance partial repeal of the unitary tax, but so far he has insisted that the surplus will not be large enough for general tax relief.

When questioned this week about general tax relief bills being introduced in the Legislature, Deukmejian was noncommittal, saying only that he would consider such a bill when--and if--it reaches his desk.

Naylor Pushing for Relief

Assemblyman Robert W. Naylor (R-Menlo Park), a former Republican Assembly leader, is one of the GOP legislators pushing for such relief.

Naylor, an announced candidate for the U.S. Senate in the 1986 primary election, said the surplus at the end of the next fiscal year could be as high as $2.2 billion, which under his bill would mean a tax cut of $1.2 billion.

“The temptation is to spend the money once it is there, so I think we have to put into law a mechanism to give it back to the taxpayers before it is used to expand government,” he said

Naylor’s bill proposes temporary or permanent tax reductions depending on the amount of surplus that exists once the 3.7% reserve is established. One-time tax credits of up to $50 per taxpayer would be issued if the amount is below $500 million. Permanent cuts, through such things as deductions allowed for Individual Retirement Accounts and increased child-care tax credits, would be put into place if the amount is more than $500 million.

In addition to the Hannigan and Naylor bills, other proposed legislation includes a bill by Assemblyman Gary A. Condit (D-Ceres), which so far has 12 Republican and Democratic co-authors, to funnel surplus funds into a special account earmarked for tax rebates or credits whenever the reserve goes beyond 3.7%.

Assemblyman Jim Costa (D-Fresno) has a bill which would increase the state renters’ credit and homeowners’ exemption whenever revenues exceed the 3.7% reserve, and a proposal by Sen. William Campbell (R-Hacienda Heights) would allow the Franchise Tax Board to adjust income tax brackets whenever there are excess revenues.