SACRAMENTO — At least 8 million Californians are scheduled to receive their state tax rebate checks sometime during the Christmas holiday season, but the U.S. Treasury will end up with the biggest gift of all.
Internal Revenue Service officials told the Franchise Tax Board on Friday that for about 40% of Californians--those who itemize deductions--the rebate checks will be taxed as income on federal tax returns.
That means the federal government will be the largest single beneficiary of California's $1.1-billion budget surplus--taking an estimated $167 million that was supposed to be returned to taxpayers. An additional $7 million will be spent to process and mail the checks. The IRS ruling came after several weeks of discussions between the staffs of the IRS and the Franchise Tax Board, which had argued that none of the rebate should be taxed.
The board, meeting in Los Angeles, could have appealed the decision. But state Controller Gray Davis, who chairs the three-member panel, said doing so would have accomplished little and might have resulted in a ruling that would have taxed rebates of all recipients.
'Tax on a Tax'
"This has the appearance of a tax on a tax and I don't think it is right," Davis said. "I don't think the federal government should profit simply because California collected an excess of taxes in 1986. But since we felt there would be some benefit to those who don't itemize, we decided to accept the (IRS) report."
Under the ruling, an estimated 60% of taxpayers, those who do not itemize deductions, will escape federal taxes on their rebates. None of the rebate checks will be subject to state income taxes.
All Californians who filed a 1986 state tax return will be eligible for rebates whether or not they paid income taxes. In all, about 12 million checks averaging $94 will be mailed out beginning early in November, although about 4 million of those are not expected to be received until after the Christmas and New Year holidays.
In general, the amount of the rebate will be 15% of an income taxpayer's 1986 liability, but it cannot be less than $32 or more than $118 for a single filer. Those who filed jointly or as heads of households will receive at least $64 but not more than $232.
U.S. to Get $40 to $50
State tax analysts have estimated that the federal tax on rebates for those who itemize deductions will average $40 to $50.
The rebate is the result of a 1979 ballot initiative that limits state government spending and requires that whenever the state collects more than it is allowed to spend, the surplus be refunded to taxpayers.
State Supt. of Public Instruction Bill Honig, who had opposed the rebate on grounds that the money could be better spent on education, said "it is a shame" that a portion of the surplus will go to "subsidize the federal government." He added that the IRS ruling "strengthens the resolve" of proponents of a proposed ballot measure aimed at loosening the spending limit.
The Commission on State Finance recently predicted that unless the limit is modified, taxpayers will be eligible for another $428-million rebate next year.