SACRAMENTO — The Internal Revenue Service was asked Thursday for a swift ruling on whether the $1.1 billion in tax rebates that Californians are scheduled to receive during the Christmas season can be taxed as income by the federal government.
The request to IRS Commissioner Lawrence B. Gibbs was made in a letter from state Controller Gray Davis, who told Gibbs that the legal staff of the state Franchise Tax Board has concluded that the rebate would not be taxable by the IRS.
The rebate, forged as a compromise last week by Gov. George Deukmejian and legislative leaders, will be sent to 12 million Californians starting about Nov. 1. Recipients will be those who filed a state income-tax return for 1986, renters' credit recipients and low-income homeowners, whether they paid an income tax or not.
The rebate checks are expected to average about $94. In general, the amount will be 15% of an income taxpayer's 1986 liability, but it cannot be less than $32 nor more than $118 for a single taxpayer. Those who filed jointly or as heads of households will receive at least $64 but not more than $232.
Davis' Name on Checks
The name of Controller Davis, who is a potential candidate for governor, will appear on every rebate check. He called a press conference Thursday to discuss the rebate and his letter to Gibbs.
Davis estimates that about 8 million checks will be mailed by Christmas and that the remainder will be out in time to meet the Jan. 15 deadline imposed by the legislation.
Throughout legislative debate on the rebate issue, lawmakers were reminded by tax staff consultants that the IRS likely would regard rebate checks as taxable income for those 4.1 million Californians who itemize their federal returns.
Analysts at the Franchise Tax Board, which collects state income taxes, estimate the federal tax could amount to $167 million. The federal bite, they estimate, would average $40 to $50 for taxpayers who itemize.
Many Sources of Funds
However, Davis noted that the $1.1 billion surplus that the state was legally unable to spend represented money accumulated not only from the income tax but also from sales taxes, various business levies, motor vehicle fees and banks and corporations.
Davis said it is unknown precisely how much each tax source contributed to the surplus. However, during hearings on the legislation, it was estimated that income taxpayers shelled out 70% to 80% of the total.
The law, Davis noted, expressly authorizes rebates for low-income people even if they had no 1986 income-tax liability. The law specifies that these rebates are "a return to them of a portion of the sales and use taxes paid by them during the 1986-87 fiscal year."
Thus, the board's legal staff concluded that the rebates provided by the Legislature "do not constitute 'refunds of state income taxes' " for purposes of federal income-tax liability, Davis told Gibbs in the letter.
Davis asked Gibbs for a "speedy" ruling, noting that the rebate program will get under way in November and that taxpayers whose rebate would be subject to a federal tax must be notified.
The rebate is the result of a 1979 ballot initiative that limits state government appropriations and requires that if the state collects more money than it is authorized to spend, the excess has to be returned to taxpayers.
Deukmejian had proposed that the fairest way to dispose of the surplus would be to return the entire sum to income taxpayers. Democrats, however, maintained that Californians with little or no income-tax liability did pay other taxes and should get their share.
In the end, roughly $900 million was earmarked for income taxpayers and $200 million for low-income people, chiefly renters and senior citizen homeowners.