Wilson Tax Cut Plan Banks on Bullish Future

SACRAMENTO —  In Gov. Pete Wilson’s view, the Asian financial crisis will be little more than a blip on California’s economic screen. Fears that business will take a dive if computers crash in the year 2000 are a mere aside.

Wilson is so bullish about California’s future that he is staking his legacy on it--at least based on proposed tax cut legislation that has emerged after weeks of talks with Democratic leaders.

A draft of the legislation obtained by The Times shows that Wilson has backed off his earlier insistence on a massive tax cut to take full effect by 2001. Instead, he has agreed to a smaller reduction next year, with the potential of deeper cuts five years into the future, but only if the economy remains strong.

To leave office with taxes lower than when he became governor, Wilson must preside over a tax cut of unprecedented size--roughly $1.8 billion by his aides’ estimate; $3.6 billion according to others.

Accordingly, Wilson spent much of the spring and summer pushing for a $3.6-billion cut in the annual tax that Californians pay to register their cars, a fee that averages $151 a year per vehicle.

At first, he proposed cutting the tax in half next year to save Californians $2 billion, and slicing it by half again in 2001, for a total reduction of 75%, or $3.6 billion when fully phased in.

But in a compromise, Wilson significantly pared back his proposal, according to the draft legislation. What’s more, most of the tax cut would take place only if the state’s economy significantly outperforms predictions by Wilson’s own Department of Finance advisors.

The proposal is being honed this weekend by Wilson and legislative leaders. The plan now being considered contains only one sure cut--a 25% reduction in the car tax in January. That would save taxpayers $1 billion, half what Wilson first proposed.

The sum eventually could rise to $3.2 billion. But according to the draft legislation, future tax cuts would take place only if Sacramento collects billions more than expected. The future cuts would take place at yearly intervals starting in 2001, and continue through the fiscal year 2003-2004.

Vote Likely Later This Month

The tax proposal is the linchpin of this year’s $76-billion budget. Wilson and the Legislature are a month past the July 1 start of the budget year and the constitutional deadline for a spending plan.

The tax cut being circulated is the one that, with modifications, probably will go to the full Legislature for a vote when lawmakers take up the final budget later in August.

The plan would dictate tax policy for the next five years, long after Wilson is gone from office. It could impose cuts throughout his successor’s term, and on into the term of whoever is elected governor in 2002.

“I find it offensive,” said Lenny Goldberg, a tax expert and lobbyist who represents a variety of groups, including labor. “If you’re Pete Wilson, your hand reaches into the administration of the governor after you, and the one after that. We’re on autopilot, no matter the needs.”

The proposal faces attack from the right. Some Republicans, hoping for deeper and more immediate cuts, are underwhelmed by the ambiguity of future tax cuts, though they probably would be unable to muster the votes to scuttle the proposal.

“Frankly, I’m not impressed,” said Assemblyman Tom McClintock (R-Northridge), adding that the economic underpinnings of the tax cut “range from fanciful to ludicrous.”

“A one-time 25% reduction in what motorists pay is not what we were after. . . . It makes it obvious we must proceed with an initiative if we are to rid ourselves of this tax,” he said.

However, majority Democrats like the idea. Although they initially opposed any tax cut this year, they since have agreed to a $1-billion car tax cut in 1999. Senate President Pro Tem John Burton (D-San Francisco) also is helping to shape an additional $400 million in smaller tax breaks for specific businesses, such as the horse racing industry, and individuals, including renters and older homeowners on fixed incomes.

While there probably will be a $1.4-billion tax cut in 1999, Democrats fended off the bulk of the reduction Wilson first demanded, at least for now. Even if there are future cuts, there still would be more money for education and other programs they favor.

“It allows Wilson to claim the rhetoric, while it substantially preserves the state budget,” said Assemblyman Bob Hertzberg (D-Sherman Oaks). In order for future cuts to kick in, “the economy has to be performing so well that we Democrats would give tax cuts anyway.”

For his part, Wilson contends that a tax cut is “only fair.”

Calculations Are Complex

In 1991, Wilson’s first year in office, the economy was mired in the worst recession since the 1930s. Wilson tried to fill an unprecedented $14-billion deficit by presiding over a package of tax hikes that raised more than $5.5 billion a year. Included was a $900-million-a-year increase in the car tax.

The Republican governor has been trying to cut taxes ever since. For three years running, he has convinced lawmakers to lower taxes for businesses and individuals by more than $2 billion.

Still, with the improved economy, more Californians are working and getting raises. As a result, they paid $4.4 billion more taxes this year than the Department of Finance anticipated.

Another tax cut not only would allow “Californians to hold on to more of their earnings,” Wilson said, it would “put state government on a shorter leash,” so future surpluses won’t be used solely for new programs.

The calculations that would result in the future cuts are far from simple. But here’s the formula:

First, there’s the long-range economic forecast.

In May, Wilson’s Department of Finance produced a five-year economic forecast, itself a complex series of assumptions about California’s future. The forecast considers elements such as inflation, population growth and the growth in jobs and wages.

It assumes that although California’s economy will slow somewhat, the trend is for expansion through 2003 and beyond.

As the economy expands, increasing numbers of Californians will pay more taxes on income, purchases of consumer goods and business profits. That, in turn, will swell the state’s general fund, the biggest part of the state budget and the one that pays for most programs.

This year, the general fund will be $57.9 billion. According to the Department of Finance, two years from now the general fund will expand to $64.3 billion, and so on until 2003-2004, when it will be $75 billion.

Next comes a dash of optimism.

Forecasts Indicate More Growth Likely

Wilson assumes that his advisors low-balled the economy’s strength. In fact, he hopes, the general fund two years from now will be $1.5 billion higher than their projections. If that happens, a second tax cut would be triggered, lowering the car tax 35% from its current level, or roughly $1.5 billion a year, starting in 2001.

Wilson is banking on the following years being better still. If revenue exceeds the current forecasts, there would be subsequent tax cuts each year through 2004.

By then, Wilson believes, the general fund will rise to $78.5 billion, triggering the final car tax reduction. It would drop 67.5% from its current level for a combined annual savings to taxpayers of $3.2 billion.

A general fund of $78.5 billion would represent growth of roughly 35% over five years. That’s not unheard of. This year’s general fund is 35% more than the one five years ago.

Wilson seems confident that it will all fall into place.

At a news conference last month, the governor rattled off numbers and statistics about job growth and long-range business trends as if he were teaching an economics class, or trying to make a sale.

“All the forecasts indicate that we will continue to see economic growth,” Wilson said as he displayed charts detailing an optimistic future. “And if we are looking at warning signs on the horizon, then the forecast is really for a very soft landing.”

Wilson relies for his numbers on the Department of Finance. Legislators turn to the legislative analyst’s office. Neither disagrees significantly about the trends, though the legislative analyst is slightly less optimistic. The UCLA Business Forecast is somewhat more bullish than the Department of Finance.

They all agree that forecasts are just that. “You’re not trying to hit the jackpot each year,” said economist Tom Lieser of UCLA. “We hope we do a good job on this year, and next year as well.”

But their assumptions do provide a window into how some of the state’s top economists view California’s future.

In some years during the 1970s, California’s economy grew 10%. No one expects that will happen again soon. Now, annual growth of 3% is more likely.

The San Francisco Bay Area and the Silicon Valley won’t expand as rapidly as they have in recent years. But there will be more growth in the Los Angeles area, which has yet to fully recover from the recession, the economists predict.

Statewide population will top 35 million, the Department of Finance believes. The state’s unemployment rate, now 5.5%, will fall to 5% by 2002. Wages and salaries will grow 8.6% this year, with increases tailing off to less than 7% next year and 6.2% in 2001, the Department of Finance assumes.

Whether that growth will translate into billions more flowing into state coffers remains to be seen.

Ted Gibson, the finance department’s chief economist, points out that in California’s trillion-dollar economy, a tiny underestimate can result in hundreds of millions of dollars more to the state.

“If our revenue estimates are off a tenth of a percent a year compounded, we’re talking about $500-$600 million extra,” Gibson said.

Another Capitol source familiar with the economic forecasts had his doubts. “Let’s face it. There have been discrepancies [between forecasts and reality] before. It is certainly possible, but to have growth occur on a sustained basis in those amounts would not seem like a high probability.”