$1.4-Billion Tax Bill Approved by State Senate

The Senate, inching toward erasing a record budget deficit, passed an income tax bill Thursday that would raise $1.4 billion annually by reducing renters’ credits, requiring independent contractors to pay withholding taxes and capping interest deductions on home mortgages at $70,000 annually.

Shortly after the Senate vote, Republican Gov. Pete Wilson and legislative leaders met privately and reportedly were nearing agreement on the sticking points that have been holding up an overall budget package.

Assembly Republican Leader Ross Johnson of La Habra remained the only holdout. Johnson said Wilson, Senate GOP Leader Ken Maddy of Fresno, Assembly Speaker Willie Brown (D-San Francisco) and Senate Democratic leader David A. Roberti of Los Angeles had agreed to a number of unresolved issues.

Johnson, who is continuing to hold out for deeper cuts and against higher taxes, said the agreement among the other participants in the meeting would cut aid to welfare mothers by 4.4% and eliminate cost-of-living increases for five years. Johnson also said Wilson agreed to drop his plan to take over control of the California Public Employees’ Retirement System Board of Directors. Instead he would create a new authority that would operate independently from the CalPERS board to set pension fund contribution rates. None of the other participants could be reached for comment.

The Senate action and the agreement by Wilson and legislative leaders ended days of relative inactivity by the Legislature on budget issues. There were other budget developments on a variety of fronts:

- The Senate, in addition to passing the income tax bill, approved legislation freeing extra money for schools and laying the groundwork for a constitutional change that would allow budget bills to pass on a simple majority vote. Wilson immediately signed the school funding bill.

- An offer by Wilson to forfeit 5% of his $120,000 salary was derided as a “cheap political trick” by a negotiator for the state employees union. Nonetheless, four other statewide elected officials, all of them Democrats, pledged to follow Wilson’s lead.

- In a letter to Wilson, and Democratic leaders of the Assembly and Senate, the chief of CalPERS raised constitutional questions about the latest plan to use $1.6 billion in so-called “excess” earnings from the $62.4-billion CalPERS pension fund to help balance the budget.

- The Senate Education Committee passed a bill establishing a limited “choice” plan for public schools that would allow parents to transfer their children from one school district to another if certain conditions are met. Wilson has insisted that the school choice bill be part of the overall budget agreement, but it is strongly resisted by the California Teachers Assn. and United Teachers-Los Angeles.

The productive session by the Senate, coming after days of inactivity, merely set the stage for action by both houses this weekend. The Senate and Assembly must complete work on more than 30 bills by Monday, the first day of the 1991-92 fiscal year.

Although both houses have already approved a $56.4-billion spending plan for the new fiscal year, Wilson has said he will veto the budget unless he gets supporting tax increases and spending cuts he wants to pay off a $14.3-billion deficit.

The income tax bill approved by the Senate and sent to the Assembly for final action is a key part of Wilson’s package of $7.7 billion in tax increases that he said is necessary to help close the deficit.

The measure was approved 27 to 12 with Democrats supporting it in a party-line vote.

Wilson and Maddy basically agree on the tax legislation. But GOP senators voted against it because of a provision that would remove the tax-exempt status of private organizations that include in their bylaws a prohibition from membership based on age, race, sex, religion, color and national origin, but not sexual orientation. Staff members said this provision was aimed chiefly at golf courses and country clubs that have discriminatory membership restrictions.

Maddy said the discriminatory membership provision was outside the “context of the overall budget” and argued that it should be dealt with in a separate bill.

Roberti said that by passing the bill “hopefully we can strike a blow for full funding of the budget and tax equity.” He lamented reduction of renters’ tax credits, one of his pet programs, saying the treatment of renters was “unfortunate but necessary.”

“Overall, it is a good bill with some warts,” Roberti said.

The legislation would continue to allow renters to take income tax credits of $60 a year for individuals and $120 for couples, but would limit them to married people earning $40,000 or less or individuals earning $20,000.

The proposed constitutional amendment that would allow budget bills to pass on a majority vote would end the current two-thirds voting requirement. Majority-party Democrats long have complained that the two-thirds requirement is the chief reason for the drawn-out budget fights of recent years. The measure, likely to face tougher opposition in the Assembly, passed 27 to 11. Republicans cast all the “no” votes.

Roberti, during the floor debate on the bill, told the Senate that the two-thirds vote rule on the budget allows “duplicitous” legislators to hide from having to clearly explain their budget votes to constituents. He called a simple majority rule a “basic American concept” that had been eroded by so-called super-majority votes.

But GOP Caucus Chairman Bill Leonard of Big Bear told the Senate that the two-thirds vote rule on budgets, “has worked to keep the state in a reasonable sense of proportionality” between spending and taxing of constituents. He predicted voters would reject the measure if it appears on the ballot.

The school funding bill, perhaps the least controversial of the three measures passed by the Senate Thursday, nevertheless faced stiff opposition in recent weeks from counties. That’s because it would repeal legislation approved last year that allows counties to bill school districts for administrative costs associated with collecting property taxes.

Estimates are that it will save educators $134 million annually. The measure passed on a bipartisan 33-to-1 vote.

As part of his plan to erase the budget shortfall, Wilson has proposed a 5% pay cut for state workers, reduced health and pension benefits and the elimination of as many as 22,000 positions.

Wilson has said he will return $6,000 of his $120,000 annual salary to the state and will require his Cabinet and aides to take pay cuts. A decision of a salary-setting commission boosted Wilson’s pay 40% over the $85,000 paid to former Gov. George Deukmejian

“The governor is serious about spreading the pain,” said Franz Wisner, Wilson’s assistant press secretary. “When he says he’s serious, he means himself, his staff, and everyone in government.”

The move prompted some anger and bemusement from state employees and legislators who said the governor’s action amounted to a publicity stunt.

“I’m disgusted,” said Jim Hard, who negotiates for 28,000 white-collar employees represented by the California State Employees Assn. “It’s a very cheap political trick. We’d be more than willing to reduce our salaries by 5% too if we just got a 41% raise.”

None of the Legislative leaders offered to match Wilson’s gesture. Rank-and-file lawmakers were also skeptical.

“That’s great for the governor. It is grandstanding,” said Sen. Ralph Dills (D-Gardena).

Nonetheless, four other statewide officials said they would be willing to give up 5% of their salaries if their employees lose that amount in contract negotiations.

Lt. Gov. Leo McCarthy, Controller Gray Davis, state Schools Supt. Bill Honig, Treasurer Kathleen Brown, and Secretary of State March Fong Eu all said they would take a cut in pay. Eu’s son, Matt Fong, a member of the Board of Equalization, said he had not decided whether to take a salary reduction.

When told his mother had agreed to give up part of her salary, Fong quipped, “Yeah, but her house is paid for.”

Times staff writers Daniel M. Weintraub, Paul Jacobs, Virginia Ellis and William Trombley, contributed to this article.