Forty-two days into the fiscal year, the Legislature sent Governor Pete Wilson a $77 billion state budget with a record $1.4 billion package of tax cuts - tax relief that could grow to $3.6 billion a year in five years if certain revenue goals are achieved.

Bipartisan Senate and Assembly votes approved the budget bill, AB 1656 by Assemblywoman Denise Moreno Ducheny, and numerous trailer bills, including three dealing with taxes. A 34-4 Senate vote passed the budget on August 10, and the Assembly, by a 65-13 tally, followed suit one day later, ending the third-longest budget impasse in California history.

Approval of the budget was expected along with line-item vetoes amounting to at least $500 million to provide a larger emergency reserve than the $130 million provided by the Legislature.

Unveiling the compromise, the governor said the deal involves "the biggest tax cut not just in the history of the state of California. It means the biggest tax cut in the history of any state in the nation ... No one is close."

The 1998-99 California budget includes the biggest year-to-year spending increase in state history. Last year's budget was $69.6 billion.

Democrat leaders originally opposed any cut in the vehicle license fee, or car tax. The final product reduced the governor's original car-tax cut proposal from 75 percent to 67.5 percent. While his initial proposal called for a first-year 50 percent reduction in the tax rate, effective next January 1, the compromise provides a permanent 25 percent offset against the 2 percent tax based on the value of a vehicle. The $1 billion-a-year reduction amounts to $42.75 per car based on the average annual car tax of $171. The offset also applies to commercial vehicles.

Depending on revenues, the car-tax reduction would be 35 percent in 2001, 46.5 percent in 2002, and 55 percent or 67.5 percent in 2003. The formula for triggering the increase to a 35 percent offset requires 2000-2001 revenues at least $1.5 billion above the Department of Finance forecast, and it takes two years of meeting the minimum revenue test before any level above a 25 percent offset can become permanent.

The $400 million in tax relief beyond the car-tax cut for the current budget year includes acceleration of the dependent tax credit increase that was approved last year. It adds $100 to the credit of $120 for 1998, taking it to $220.

The deal also provides a $60 renters' tax credit for those with income below $25,000, or $120 for couples with income below $50,000. The renter must have a tax liability to gain the credit.

Thirteen targeted tax relief measures are part of the package, though 10 would not occur if voters in November approve Proposition 7, which has $218 million in annual "clean air" tax credits. Not linked to the fate of Proposition 7 are federal income tax conformity provisions of SB 484 (Alpert) and tax credits related to production of the Joint Strike Fighter, which were placed in AB 2797 (Cardoza). A reduction in horse race license fees stood alone in SB 27 (Maddy).

Here are targeted tax cuts contingent upon voter rejection of Proposition 7:

Minimum Tax Reduction. New, small businesses will pay a reduced minimum tax, with the first year's payment cut from $600 to $300, and the second year's payment cut from $800 to $500.

Research and Development Credit. The alternative incremental research expense credit is increased to 80 percent of the federal credit.

MIC for Software. The existing manufacturers' investment credit (MIC) is expanded to include equipment used in the production of computer programming and software. It allows businesses to claim a 6 percent credit against income or franchise tax for purchases of qualified property.

Post-production Equipment. An exemption from the 5 percent state general fund sales and use tax is provided for property used in teleproduction or post-production services for film and video.

Self-employed Health Insurance. The percentage of health insurance expenses that self-employed individuals could deduct for income tax purposes is increased from 25 percent to 40 percent.

Child Care Credit. The tax credit for employers who provide child care programs or contribute to the child care expenses of employees is permanently extended.

Space Launches. The sales tax exemption for property used in space flights is permanently extended and is no longer limited to flights originating from Vandenberg Air Force Base.

Enterprise Zones. The enterprise zone program is modified to provide for a five-year extension of the original zones. It also allows small zones to expand, and allows zones to voluntarily revoke their designation, and changes apportionment formulas.

Perennial Plants. Non-annual plants that produce food for human consumption or that are resold in the normal course of business are exempt from the sales tax. Thus perennial plants would have the same tax treatment as annual plants.

Estate Tax. The interest rate charged for underpayments and nonpayments on estate taxes conforms with federal law. In addition, installment payments are permitted, as federal law allows.

The budget compromise also includes significant increases in spending, including a 7.9 percent hike in welfare benefits, about one-third of it depending on future revenue growth. The budget includes an additional $800 million for education, including lengthening the school year by eight days. Counties get an additional $93 million for operation of trial courts.

State general fund revenues are used to make up for local governments' losses in car-tax money.

Senate President Pro Tem John Burton said the budget contains "something for everyone," and "our main concern was the level of the hit on future spending. We were worried about mortgaging the state's future." He also said it was "the first time in a long time that the poor people of this state got a piece of economic bounty."

Assembly Republican Leader Bill Leonard called it a "great budget" for family taxpayers and education, and "I am totally confident" that the economy will produce sufficient revenues to fund each tax cut.