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CLINTON BUDGET PACKAGE : Will the Blow Fall on California? : With Its Many Defense Plants and Above-Average Incomes, the State Is Likely to Feel theBurden of New Budget Proposals


California's recession-racked economy will bear more than its share of the burden to reduce the federal deficit under the budget package narrowly passed by the House on Thursday, mainly because defense cuts and higher income taxes will fall heaviest here, economists said.

Less clear is whether that increased burden will wreck the economy or derail a recovery that no one expects to occur before the middle of 1994 anyway.

Some economists argue that the increased tax burden will lead to greater job losses and a severe drain on the economy.

But others argue that the blow on the state's economy will be softened in part by new investment incentives and by the long-term benefits of deficit reduction.

"The question is: how much of a positive impact lower long-term interest rates will have on offsetting the impact of higher taxes," said Lynn Reaser, chief economist at First Interstate Bancorp. in Los Angeles.

Estimates of California's contribution to the total program range as high as $84 billion by Gov. Pete Wilson's Office of Planning and Research. In other words, California, with 12% of the nation's population, could pay up to 16.9% of the five-year, $496-billion deficit reduction package.

That translates into a loss of 359,000 jobs per year over the next five years, the governor's office estimates. The state Department of Finance puts the figure closer to $64 billion, or 13%, assuming lower defense cuts.

But Sen. Barbara Boxer (D-Calif.) and Budget Director Leon Panetta, among others, have strongly disputed those figures. Boxer estimates that the package will create nearly 2 million jobs in California over the next five years.

California will benefit from an extension of a research and development tax credit, of particular interest to the state's high-tech industry; strengthening tax incentives aimed at small businesses, expanding the earned income tax credit for low-wage earners, and creation of so-called empowerment zones to encourage investment in inner city areas--one of which is likely to be in Los Angeles.

One thing is clear: California has more than its share of the higher-income individuals who will pay more taxes.

The budget package would raise from 31% to 36% the tax rate on couples with annual taxable income of more than $140,000 and individuals with incomes above $115,000. Those earning more than $250,000 would have to pay a new surcharge as well, raising their effective tax rate to 39.6%.

California has more of those taxpayers than any other state: 15.4% of the returns with adjusted gross income greater than $200,000--those most likely to bear the brunt of the new tax rate, the Internal Revenue Service reported.

"It's clear there's a more significant burden on California taxpayers than in the rest of the country," said Richard Wolf, partner in charge of the Century City tax department at Deloitte & Touche, the New-York-based accounting firm.

Practically speaking, however, that's only a small fraction of the state's total taxpayers: just 130,077 returns, less than 1% of the 13.8 million total returns filed by California residents.

For a couple filing jointly with income of $200,000 a year, the tax hike means an increase of about $1,300, Wolf estimated. For a single person, the tax hike is $2,856.

Still, the prospect of a tax hike may be enough to erode consumer confidence. "In an environment where we're in recession, . . . this just exacerbates it," said Jeff J. Saccacio, director of personal financial services at the accounting firm Coopers & Lybrand. "Not only are people worried about whether they'll have a job, they're worried about someone dipping into their pockets a little more."

Meanwhile, California, with about 23% of the nation's defense spending, could bear up to 33% of the defense cuts over the five-year period, the governor's office argues.

Though these cuts have yet to be finally decided, the state got a preview of its likely burden when an independent panel recommended the closure of five major Bay Area naval installations, which would result in the loss of about 41,000 jobs.

Cuts may be offset in part by other funds. The state Department of Finance estimates that California could receive as much as 20% of the estimated $17 billion in both defense conversion and technology spending over six years.

A spokesman in the Office of Management and Budget disputed the level of cuts.

"I'm glad the governor's office knows what the President's defense budget will be over the next five years and where the savings will be reached, because the President doesn't know that yet himself," said Barry Toiv, spokesman for OMB. "It also ignores the impact or understates the impact of the President's defense-conversion program."

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