Debate on Tax Cut Revs Up in Capitol

SACRAMENTO — Gov. Pete Wilson and his aides huddled in an effort to come up with a possible tax cut package Thursday, one day after the Senate’s top Democrat surprised the governor and some Democrats by suggesting that a personal income tax cut should be considered.

But as Republican lawmakers quickly called for a general tax cut, Assembly Democrats distanced themselves from the talk, and lobbyists for public schools, which would lose big if there is a general tax cut, worked to squelch any drive to roll back taxes.

In another twist, Senate President Pro Tem Bill Lockyer (D-Hayward) appeared to soften his position, saying that although the income tax cut should be considered, he was not advocating such a cut.

“The arguments against a cut probably outweigh those arguments for it,” Lockyer said in an interview Thursday. “But I still think it is a close call and worth a discussion.”

Noting that revenue from personal income taxes accounts for about half the state’s general fund, Lockyer said, “Those taxes are arguably quite high, and as a matter of fairness we should consider some changes in those rate schedules.

“Again,” Lockyer added, “I’m not an advocate of this. But I think it is reasonable to consider this.”

Wilson pushed hard for a 15% income tax cut in 1995 and 1996. But in a turnaround this year, the Republican governor dropped the idea, despite issuing a revised budget Wednesday showing that state coffers are receiving $2.2 billion in unexpected revenue, largely from income tax revenue.

In explaining his decision to not revive his income tax cut proposal, Wilson said Wednesday that Democrats, who control the Legislature, would kill any broad tax cut, and blamed opposition from the influential public education lobby.

But Lockyer responded to Wilson late Wednesday by issuing a statement saying that a personal income tax cut should be “on the table.”

“We are delighted there appears . . . [there] may be some consensus that we can provide income tax relief,” said Sean Walsh, Wilson’s spokesman, Thursday.

Walsh said Wilson has spoken to members of his council of economic advisors, including former Secretary of State George Shultz. Shultz, an economist, was among those who suggested that Wilson offer the 15% income tax cut last year and the year before.

At least for now, Wilson is not reviving the 15% tax cut. Instead, he continues to press his proposal for a 10% tax cut for corporations and banks, saying that a business tax cut is necessary to persuade employers to locate in California and expand their operations here.

Wilson’s financial advisors say the $2.2 billion in new revenue is a result of California’s expanding economy. With more Californians working at higher paying jobs, revenue from income taxes is far exceeding projections, accounting for almost all the additional windfall.

Lockyer’s comments about income tax cuts raised the stakes in this year’s state budget negotiations.

Although there may not be votes for a general tax cut, Lockyer’s move suggests that Wilson and the Legislature’s leadership will emerge with some sort of tax cut package as part of any deal this summer on the 1997-1998 budget that begins July 1.

In the Assembly, a Democratic-controlled committee on taxation this week approved bills that would give various businesses more than $6 billion in tax breaks. One of those bills contained Wilson’s 10% tax cut plan for corporations and banks.

“There is no question in my mind that the state is enjoying this additional revenue [and] we should be talking about a tax cut,” said Assemblyman Fred Aguiar (R-Chino).

Lobbyists for public schools, who were caught off-guard by Lockyer’s comments, vowed to oppose any general tax cut.

“We would prefer it not even be on the table,” said Kevin Gordon, a lobbyist for the California School Boards Assn., adding that he was “surprised, very surprised” by Lockyer’s comments.

Gordon and others said that Democrats, led in part by Lockyer, killed Wilson’s personal income tax cut proposals in 1995 and 1996. The Republican governor’s proposal to phase in the tax cut over three years would have cost the state $8 billion, with the bulk of that coming from public schools.

“Whether it’s the governor or Lockyer, the California School Boards Assn. would be strongly opposed to it,” Gordon said. “We led the fight for three years in a row, because the cost of it for the benefit is simply not worth it.”

Siding with public schools, Assembly Democratic leaders said Thursday that they oppose a general tax cut, pointing out that such a tax cut would fall hardest on education.

Assembly Speaker Cruz Bustamante (D-Fresno) called the general tax cut “ill-advised” and said that despite a funding boost of more than 10% during the past two years, California’s schools still lag behind the national average for per student spending.

“In my family,” Bustamante said, “during the wintertime you piled up a lot of bills, and in the summertime when you were able to get more work, you paid off all those winter bills. We’ve had . . . years of recession. . . . We have a long way to go before we talk about a whole lot of things.”

But Bustamante said he would consider “targeted tax cuts” that might benefit small business operators who generate jobs.