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NEWS ANALYSIS

Tax Breaks Intensify State Fiscal Debate

January 24, 2005|Evan Halper | Times Staff Writer

SACRAMENTO — As Gov. Arnold Schwarzenegger seeks to force down government expenses, his blueprint for long-term reform leaves one area untouched: tax breaks for the wealthy and corporations.

The tax breaks allow yacht owners to avoid paying sales taxes, business partnerships to keep their property tax bills down and large corporations to move money offshore to avoid paying what would otherwise be owed to the state.

Assembly Speaker Fabian Nunez suggests that closing such loopholes could wipe out as much as half of the state's $8.6-billion deficit. Analysts say such projections are far too optimistic, but they question the governor's refusal to even look at the tax breaks.

"There are a lot of people in California who are not asked to bear any of the burden of balancing this budget," said John Ellwood, a professor of public policy at UC Berkeley. "The governor has made a policy choice. He is willing to hit the poor more than the upper-middle class and the rich."

Administration officials make no apologies. They say businesses and the wealthy are already paying too much, quoting from studies showing that Californians pay more in taxes than residents of most other states.

Not taxing enough is not the problem, according to Finance Director Tom Campbell. The problem, he says, is that when the state was flush with cash, California became overly generous in providing services -- with no plan to cover the bill in a down economy.

Using a windfall to expand ongoing programs, he said, leads to "fiscal disaster" when the money runs out. "The governor is proposing you fight fire with fire" with budget measures that would curb such expansions.

Schwarzenegger's plan includes tough reductions along with a constitutional amendment that would force across-the-board cuts in services whenever state spending outpaces revenue. The cuts would also take effect if the governor and lawmakers fail to get a budget in place by their July 1 deadline.

But critics, including Democratic leaders, argue the governor's proposals fail to take on the most extravagant state spending: tax breaks for the rich. Democrats will be focusing on that issue in a series of public budget hearings throughout the state in the coming weeks. And activists have already submitted ballot measures that would attempt to close what they see as unfair loopholes in the tax system.

"We have a major budget problem and they are refusing to look at anything having to do with our tax system," said Lenny Goldberg, a reform advocate who has filed one such ballot measure. "They are averting their eyes from 50% of the problem."

California taxpayers and businesses claim some $35 billion worth of tax breaks each year. Much of that is taken up by credits enjoyed widely by the middle class, such as the deduction for mortgage interest payments. But tax experts say others are outdated, ineffective and ripe for review.

One of the only tax breaks the governor is considering scaling back is a renters' credit for low-income seniors. Under Schwarzenegger's plan, the credit would be eliminated for elderly Californians earning more than $13,000 per year.

That proposal would save the state $100 million annually.

But the governor's plan would leave intact the mortgage deduction that the wealthy enjoy on million-dollar vacation homes. The nonpartisan Legislative Analyst's Office has suggested that removing the deduction could save the state several times the amount gained by the renters' credit cut.

Another of the governor's proposals would cut payments to caretakers for the disabled and frail elderly from more than $10 an hour to minimum wage, $6.75. The move would save the state $195 million.

Yet high-end hotels in downtown San Francisco could continue to claim tax credits from an "enterprise zone" that was intended for economically depressed neighborhoods but has now grown to include wealthy urban areas. Studies suggest the state is losing at least $50 million per year on the credits.

Schwarzenegger's plan to end set pension payments for government workers and replace them with a 401(k)-style system would net Wall Street investment firms hundreds of millions of dollars in commissions.

But there is no plan to collect the tens of millions of dollars in state taxes being lost each year from companies that shelter their income in the Caribbean. Montana has passed a law that will allow that state to begin collecting such money.

There are some loopholes where the stakes are significantly higher.

One allows numerous businesses to avoid paying the tax hike everyone else in California faces when they buy a property. In California, voter-approved Prop. 13 keeps residential and commercial property taxes from increasing more than 2% a year. When ownership changes hands, a property is supposed to be reassessed at market value, which could drive up its taxes by thousands of dollars.

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