In Dramatic Move, Legislature Approves $931-Million Tax Cut

SACRAMENTO — After an extraordinary night of cajoling, horse trading and bullying, Gov. Pete Wilson and Democratic leaders agreed as dawn approached Saturday to a $931-million tax cut package aimed primarily at middle-income families.

They proclaimed it to be the biggest broad-based tax cut in decades, although it contains little for taxpayers who do not have dependents.

“This package was designed with working Californians in mind,” Wilson said Saturday, joining legislative leaders to proclaim the 1997 session a major success. “It provides meaningful and substantial tax relief.”

The dramatic turn of events came on the final day of the legislative session, one that under the Legislature’s rules was to end at midnight, but went on until after 7 a.m. Saturday. It drew to a close with bleary-eyed lawmakers approving a massive bundle of bills that contained the tax reduction.

“It is probably the most significant personal income tax cut this state has seen in decades, if not ever,” said Assemblyman Curt Pringle (R-Garden Grove), who shuttled for days between Wilson and Democratic leaders to help put the deal together.

It came after Wilson failed last month to persuade Democrats to agree to an across-the-board reduction, seemingly dashing any chance of a significant tax cut for at least a year.

In all, the tax package will result in an estimated savings to individual taxpayers and businesses of $166 million in 1998, rising to $931 million in the 1999-2000 fiscal year, when all the provisions fully kick in.

The tax cuts in the current fiscal year are being funded by various reserves and surpluses. The much larger amounts in successive years will come from expected growth in the economy and lower expenditures on some programs and other commitments.

The deal’s main feature is a boost in the state income tax credit for children and other dependents, such as elderly parents, from the current $68 per dependent to $118 starting in January and $222 in 2000.

Wilson estimated that the increase in the dependent care credit will cut levies on 3 million state taxpayers, a third of the number who would have received a tax reduction under the plan he offered this summer.

Still, it will apply to taxpayers regardless of their income. It will provide more money to people who qualify than prior Wilson plans, and will save families a combined $637 million in taxes a year by 2000.

The package, which won near-unanimous support in the Senate and Assembly, includes a reduction in capital gains taxes for home sellers and an increase in the amount that can be saved in tax-deferred individual retirement accounts, as well as breaks for select types of businesses, including 48 million a year in credits--when the deal is fully implemented in 2000--for research and development by high-tech and aerospace companies.

By agreeing to the tax cut, Democrats--led by Senate President Pro Tem Bill Lockyer--extracted a commitment from Wilson to grant state workers a pay raise as early as January. The raise, the first for the employees since 1995, will probably be at least 3% and cost the state $300 million a year.

Lockyer and Assembly Judiciary Committee Chairwoman Martha M. Escutia (D-Bell) also secured Wilson’s support for a plan to ease the strain on cities and counties by providing $450 million to take over the bulk of the cost of county courts. Under the plan, court workers will gain collective bargaining rights, something Democrats have long sought and Republicans have fought.

The marathon session capped what until the final day had been a year in which lawmakers did little more than the minimum required. But they seemed to cram months of votes and deals into a final day that stretched out over more than 20 hours.

Lawmakers fortified themselves with coffee, soft drinks and junk food. Lockyer operated on cola and packaged popcorn, which he shoveled into his mouth by the handful. Assembly members amused themselves in the ornate chambers by tossing foam balls at one another.

Appearing at the news conference with Wilson, Lockyer choked up as he summed up the night’s work: “For those of us who have chosen this kind of work as our profession, there is no more exhilarating feeling than this--when you feel like you had your chance to paint on the canvas, and you did it, and you did it well.”

In addition to approving the tax-cut, pay-raise, court-funding deal, the Legislature took other major actions:

* Granted a 5% cut in tuition at the University of California and California State University systems and a $1-per-unit cut in fees at community colleges. The bill was carried by Assemblywoman Denise Ducheny (D-San Diego) and Sen. Jim Brulte (R-Rancho Cucamonga). The reduction will save students and their parents $52 million starting next fall. There also will be a freeze on fees for two years.

* Approved legislation that could make it easier for the San Fernando Valley to secede from Los Angeles.

* Failed to act on legislation that would have permitted smokers to light up in bars and casinos after Jan. 1. As a result, the establishments will be subject to California’s ban on smoking in indoor workplaces.

* After anguished debate, the Assembly followed the Senate’s lead and approved a bill that Wilson demanded requiring that all public school students in second through 11th grades be given a basic skills test.

Wilson is expected to respond by restoring more than $200 million in school funds, including $40 million in lawmakers’ pet projects.

* Authorized a new $480-million program to provide government-subsidized health care insurance to 580,000 children of low-income working families.

* Approved Lockyer’s bill--four years in the making--to establish a gambling commission to oversee California’s burgeoning gaming industry, and a unit in the Department of Justice to police it. Wilson said he will sign the bill.

Lockyer stripped the measure of any mention of Indian casinos, in a concession to Assembly Speaker Cruz Bustamante (D-Fresno) and tribal leaders who oppose state regulation.

In a raw display of the power of special interests, Bustamante let a dozen representatives of tribal gambling--a source of major campaign donations--lounge in the speaker’s conference room for several hours during the night.

The biggest deal of all, though, involved taxes.

The agreement seemed on the verge of crashing repeatedly during the night, but finally fell into place in the early morning.

At one point after midnight, Bustamante emerged from his office and wrote off the deal, contending that the tax cut would slash far too much money from public schools and dismissing what became the final proposal, saying, “There are so many proposals, I’m beginning to lose track.”

Other lawmakers interrupted the speaker and called him to a meeting with Assembly Democrats. He emerged an hour later with a far different take, announcing that the deal had support, including his own.

“After years of tough times, it’s nice for the Legislature to be in a position to do this much good for the people of California,” Bustamante said after it was all approved.

Moments before the speaker announced his support, Lockyer strode into a hallway in the Assembly, spotted Pringle and called out that the governor was balking.

The two lawmakers briefly conferred privately, then Pringle scurried to a phone to call Wilson. As he had done several times before, the Orange County Republican patched the package back together.

Lockyer, meanwhile, was becoming increasingly volatile during the night.

At one point, he stormed through the halls of the Capitol, confronting lobbyists, Assembly staffers, even other lawmakers, wagging his finger in their faces, loudly and profanely demanding that they support the package.

In one tirade, he told a group of union lobbyists representing state workers that they had no choice but to accept the deal, which included Wilson’s commitment to enter into serious contract negotiations. If they thought they would do better next year, Lockyer proclaimed, they were wrong.

When some union lobbyists questioned the strength of Wilson’s commitment to grant state workers raises, Lockyer said he would make sure the governor followed through and insisted that he would use next year’s budget talks to hold hostage something Wilson desires--money to finance the creation of 40 new judgeships, which the governor wants to dole out during his final year in office.

Union representatives were not mollified. Several said the bills contain nothing to ensure that Wilson will give workers raises.

The Senate began voting on the package shortly after 5 a.m., starting with bills to fund the courts and hire judges. Following custom, Senate Clerk David Valverde called out each senator’s name in alphabetical order on one of the bills--to approve the 40 new judgeships, whose funding will be decided next year--and waited for each lawmaker to announce “aye” or “no.”

The clerk called out the name of Sen. Patrick Johnston (D-Stockton). There was no response. His name was called again, louder. Other senators turned to Johnston. Seeing that fatigue had gotten to him, Brulte boomed out, “Vote ‘Aye,’ Pat!”

Johnston shook himself from his slumber and mumbled, “Aye.”

“Congratulations,” one of the senators told him. “You got five new judges.”

By the time lawmakers took up the tax cut itself, most were too tired to speechify. Even Lockyer merely outlined the contents of the bills without his customary rhetorical flourishes.

The tax cut got only two no votes, from Sen. Diane Watson (D-Los Angeles) in the upper house and Assemblywoman Diane Martinez (D-Monterey Park) in the lower house.

“Folks will save about $100, and we will lose hundreds of millions in education,” Martinez scoffed.

Conservatives embraced the cut. Assemblyman Tom McClintock (R-Northridge), having read up on the history of tax reductions, called it the largest state tax cut since Earl Warren was governor from 1943 to 1951.

“This truly is an extraordinary moment and one I never thought I would see,” McClintock said.

Times staff writers Carl Ingram and Dave Lesher contributed to this story.

* BRAGGING RIGHTS: It was a fight to the finish, but both sides had victories. A31

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tax Cut Highlights

The tax cut package fashioned by Gov. Pete Wilson and legislative leaders, the first significant state income tax reduction in decades, contains a combination of decreases for individuals and businesses. It also has components that simplify California tax law by conforming it with federal law.

INDIVIDUALS

Families--Raises the state income tax credit for children and other dependents from $68 per dependent to $118 starting in January, and $222 per dependent in 2000, with no maximum.

Who qualifies--An estimated 3 million Californians will be able to take advantage, regardless of their income.

Savings--$95 million in 1998, $637 million a year by 2000.

Capital gains--Cuts state capital gains taxes for people who have sold their homes since May 1997. Up to $250,000 is exempt from the taxes for single filers and up to $500,000 for joint filers.

Savings--$25 million in 1998, $70 million in 2000.

IRAs--Raises the amount of tax-deferred money taxpayers can save in individual retirement accounts.

Education IRAs--Parents can put up to $500 a year in a new type of IRA and withdraw it without penalty for a child’s college education.

“Roth IRAs”--Allows up to $2,000 a year in after-tax money to be saved; the money will not be taxed if it is withdrawn after age 59 1/2.

Savings--$4 million in 1998, $31 million in 2000.

Alternative minimum tax--Cuts this income tax levied on people who generally are high earners but have so many deductions that they otherwise would pay little or no income taxes. This tax now will be adjusted for inflation.

Savings--$8 million in 1998, $85 million in 2000, with most going to less wealthy people.

****

BUSINESS

Closely held corporations--Cuts taxes on closely held so-called subchapter S corporations. Although some large corporations would qualify, most who would are small and family-owned.

Savings--$18 million in 1998, $22 million in 2000.

Research--High-tech and aerospace corporations get tax credits for research and development.

Savings--$10 million in 1997, $48 million in 2000.

Shipping--Cuts California’s tax on fuel used by ships.

Savings--$5 million in 1998, $10 million in 2000.

Source: California Department of Finance

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

What Was Sent to the Governor

The Legislature gave final approval to the following bills and sent them to Gov. Pete Wilson, who must sign them, veto them or let them become law without his signature by mid-October. If enacted, the measures would:

Red Light--Increase the penalty for running a red light from $104 to $270. AB 1191 by Assemblyman Kevin Shelley (D-San Francisco).

Health--Appropriate $500,000 to finance a University of California study into the possible health risks of methyl tertiary butyl ether (MTBE), a clean air gasoline additive. SB 521 by Sen. Richard Mountjoy (R-Arcadia).

Tracking--Require police to obtain a court order to attach electronic tracking devices to the automobiles of suspected felons, but allow such tracking of suspected high-risk sex offenders without a court order. SB 43 by Sen. John Burton (D-San Francisco).

Cancer--Create a 16-member Cancer Research Council of scientists and others to study possible causes and cures for the disease, including prostate and ovarian cancers. AB 1554 by Assemblywoman Deborah Ortiz (D-Sacramento).

Witnesses--Establish a $3-million program in the state Department of Justice to provide relocation and other protection services to witnesses in criminal cases. AB 856 by Assemblyman Bob Hertzberg (D-Sherman Oaks).

Endangered--Enable growers to voluntarily restore natural habitats in exchange for being shielded from criminal charges for the incidental killing of protected species during routine farming activities. SB 231 by Sen. Jim Costa (D-Fresno).

Rent--Allow tenants to give notice--an unspecified amount--to vacate if a landlord fails to provide at least 60 days’ notice of a rent increase. SB 682 by Sen. Byron Sher (D-Stanford).

Smog--Provide funds to assist low-income vehicle owners in paying for emission control repairs. AB 57 by Assemblywoman Martha M. Escutia (D-Bell). In addition, AB 1492 by Assemblyman Scott Baugh (R-Huntington Beach) would exempt cars 4 years old or less from the smog-check requirement.

Child Support--Expand the role of the Franchise Tax Board in forcing delinquent parents to make court-ordered child support payments. AB 702 by Assemblyman Antonio Villaraigosa (D-Los Angeles).

Shelters--Extend for another two years the practice of allowing homeless people to take shelter in National Guard armories during winter months. AB 242 by Assemblyman Mike Honda (D-San Jose).

Sentence--Add 10 years to the prison sentence of a person who carries a firearm in committing a crime, 20 years if the gun is fired and 25 years to life if fired with intent to wound or kill. AB 4 by Assemblyman Tom J. Bordonaro Jr. (R-Paso Robles).

Inmates--Allow courts and prison officials to consider releasing state prison inmates if they are terminally ill. AB 29 by Villaraigosa.

Gun--Exempt old keepsake six-shooters, called “cowboy guns,” from a new law banning cheap handguns commonly used in the commission of crimes. AB 488 by Assemblyman Jack Scott (D-Altadena).

Tattoo--Require the California Youth Authority to set up tattoo removal centers in Los Angeles and the San Francisco Bay Area for use by young people who want to make themselves more marketable as prospective employees. SB 526 by Sen. Tom Hayden (D-Los Angeles).

Pollute--Renew a discharger-financed program that identifies and cleans up toxic hot spots in bays and estuaries and orders state regulators to speed up their efforts. AB 1479 by Assemblyman Michael Sweeney (D-Hayward).

College--Enable parents to invest in pooled tax-free savings accounts with other investors to help finance the college education of their children. AB 530 by Assemblyman Brooks Firestone (R-Los Olivos).