Despite Windfall, Wilson Omits Call for Income Tax Cut

SACRAMENTO — Despite an unanticipated flow of $2.2 billion in new revenues into the state treasury, Gov. Pete Wilson on Wednesday proposed a revised $68.2-billion budget that omits his call of past years for a general income tax cut for working Californians.

At the same time, Wilson stuck to his proposal for a 10% tax cut for banks and corporations, spread over two years, saying California must provide the reduction to ensure that employers continue to locate in the state and expand their operations.

Wilson’s action drew a surprising turnabout from the Capitol’s most powerful Democrat, Senate President Pro Tem Bill Lockyer, who announced that an income tax cut should be “on the table.” In the past, Lockyer, the main Democratic budget negotiator, was among the most ardent foes of the income tax cut.

By day’s end, Lockyer’s comment had prompted the governor’s office to say Wilson might put forward a tax cut after all.

“We will have to see whether this is just rhetoric in a press release or if this is legitimate,” said Sean Walsh, Wilson’s spokesman.

“We are eager to explore the many ways tax reduction can be done,” he said, adding that Wilson would not necessarily think his previous personal income tax cut was still best for today’s budget.

Since Wilson submitted his budget in January, virtually all the extra money flowing into state coffers has come from increased personal income tax payments.

As mandated by Proposition 98, the 1988 ballot initiative that established a formula for state aid to education, 98% of the new tax funds will go to public schools.

In past years, the governor pushed for the business tax cut along with a 15% personal income tax cut spread over three years.

Explaining the absence of an income tax proposal this time, Wilson said it would fail in the Democratic-controlled Legislature.

“If we had Republican majorities, we would see it,” the Republican governor said. “We have Democratic majorities. They have made it clear they are hostile to cutting taxes.”

Lockyer, however, clearly saw a political opportunity in the governor’s decision. He also called on Wilson to cut fees at state universities and colleges, which have doubled during the 1990s. “Now there’s a harsh, burdensome tax on California’s working families,” Lockyer said.

Wilson proposed the 15% income tax cut in 1995 and 1996. If he had succeeded last year, the tax cut this year would have amounted to almost $500 million, a sum that would have grown over the next two years as the full 15% cut phased in.

By 2000, the foregone revenue would have amounted to more than $8 billion. In Wilson’s original proposal, almost all of the money would have come at the expense of public schools, a fact that prompted almost all Democrats and some moderate Republicans to oppose Wilson’s plan.

In 1995 and 1996, when he was contemplating running for president, Wilson had proclaimed that the income tax cut was so important that he would place it on the ballot as an initiative if he could not persuade the Legislature to go along with him, an idea he eventually dropped.

There was no such talk on Wednesday.

Instead, citing what he called “a bumper crop of new revenue,” Wilson proposed new spending initiatives, particularly for public schools.

“With a growing economy and more Californians working than ever before, the state finally has revenues sufficient to make the kind of investments needed to address California’s most urgent priorities,” Wilson said.

The updated budget proposal reflects savings from a decline in welfare rolls, which have fallen 8% since 1995. Still, welfare spending would rise slightly from the January proposal to $14.6 billion, largely because Wilson wants to spend $277 million more on child care for parents moving off welfare.

Along with a $2-billion increase for schools, Wilson is proposing an additional $1 billion in spending increases, with money coming from reductions elsewhere in the budget, as well as from reduced borrowing and lower interest rates.

Among the beneficiaries are counties and cities, which would receive an additional $225 million in state aid. Wilson is proposing to bolster the state budget reserve, pushing it to $580 million. His budget also covers the $47 million cost of imprisoning illegal immigrants.

But the biggest winners by far are the schools.

Under Proposition 98, schools generally receive 40% of the state’s general fund budget. But the initiative includes a complex formula for school spending that in recent years has given schools the bulk of any increased revenue.

In all, elementary and secondary schools would be receiving $32.4 billion from state and local governments next fiscal year, up from $30.3 billion this year. That translates to $5,151 per student, a 10% increase from the 1995-96 fiscal year.

Of the added money, $1.4 billion would go to suburban and rural schools to bring their state payments closer to what urban schools receive--something urban Democrats generally oppose.

The governor’s proposed budget is revised annually one month after the April 15 income tax deadline. Release of the revised budget marks the opening of serious negotiations between lawmakers and Wilson over the final version.

Lawmakers predicted that they could reach a budget accord this year on or near the July 1 start of the fiscal year, the state constitutional deadline for having a budget in place.

The Legislature must approve the budget by a two-thirds majority.

Senate Budget Committee Chairman Mike Thompson (D-St. Helena) said Wednesday he was “very pleased” with the revision, saying the added revenue, coupled with a decrease in people on the welfare rolls, “will provide us with an ability to spend more money on education, where our top priority clearly is.”

Assemblyman Gary Miller (R-Diamond Bar), vice chairman of the Assembly Budget Committee, called the proposal “great, great news for education.”

A major part of the document released Wednesday by Wilson deals with explanations behind the added revenue flowing to the state. It attributes the bulk of the increase to “extremely strong growth in personal income tax revenues.”

“Taxpayers have realized significant income gains that have pushed them into higher marginal tax brackets,” the document said. “This has resulted in revenue growth far in excess of income growth.”

Wages grew 5.1% in 1995 and 6% in 1996, the document said. By contrast, Californians’ personal income tax liability grew 12.4% in 1995 and 14% in 1996.

Craig Brown, Wilson’s finance director, explained the gap by saying that more Californians are finding jobs in higher paying industries, and are therefore paying more in taxes. Much of California’s job growth is in high-income fields such as computer software, motion pictures and biotechnology.