A Year of Transition, Turbulence and Taxpayer Vigilance

By Larry McCarthy

This is a year of transition in California political offices, and history suggests it must also be a year for taxpayers to keep a close watch on tax and spending issues.

The state's turbulent political landscape results from developments at the ballot box and in the courts, where term limits for legislators were upheld. The courts also allowed an open primary initiative to take effect this year, and the courts rejected voter-approved limits on campaign contributions. Both the Assembly and the Senate will operate under new leaders in 1998.

In the context of this change, it is impossible to predict whether taxpayers will be celebrating when they reflect on 1998, as they did when recapping achievements of 1996 and 1997. Taxpayers applauded the governor and the Legislature for providing substantial reductions in taxes, including the largest personal income tax cut for Californians in half a century.

Even without all the political litigation and uncertainty that preceded this election year in California, students of history should be mindful that the year before a change in gubernatorial administrations (Pete Wilson cannot seek a third term) could be a perilous time for taxpayers. Spending issues always needed closer scrutiny in the year before the election of a new governor.

Only once in the past 40 years (Jerry Brown in 1975) has a governor taken office without having to face a serious deficit and demand for higher taxes.

In 1959, Pat Brown raised bank and corporation income taxes and personal income taxes, and an oil severance tax was considered. In 1967, Ronald Reagan raised business and individual income taxes and sales taxes. In 1983, George Deukmejian imposed a supplemental property tax, increased the vehicle license fee and made other changes. In 1991, Pete Wilson was confronted by a record budget deficit caused in part by too much spending in prior years. He approved increases in sales and personal income taxes, university fees and other hikes.

Clearly, this must be a year of vigilance for taxpayers, and here are some of the major taxpayer issues to watch in 1998:

• Electronic Commerce. The Assembly last year approved AB 1614 (Lempert), which would prohibit new state or local taxes on the Internet, or on electronic commerce. The bill, California's version of the Cox-Wyden Internet Tax Freedom Act pending in Congress, awaits action in the state Senate and is supported by the California Taxpayers' Association (Cal-Tax).
• Taxes. Expanding the manufacturers' investment tax credit for motion picture and computer software industries, and incentives for donations of computers to schools are important Cal-Tax priorities to improve investment in California and make this state more competitive for investment and jobs. As economic forecasts are updated in May, the possibility of a surge in revenue could provide an opportunity for tax cuts, particularly for the business community to help create more jobs. California's bank and corporation tax rate is still among the highest in the nation.

Also expected to be debated this year are measures to reduce motor vehicle license fees, conformity to various changes in federal tax law, and reinstatement of the renters' tax credit.

• Bonds. The June and November statewide ballots could feature billions of dollars in proposed general obligation bonds. Proposals by the governor include $2 billion for school construction issues and $2.1 billion for water projects among a record $7 billion in proposals that would address pressing infrastructure needs of the state. This increased debt will receive careful attention.
• Ballot Initiatives. Initiative campaigns funded by public employee unions and aimed for the November ballot would repeal business tax incentives, and reverse positive tax climate changes enacted by the legislature in recent years. On the June ballot is another public employee-backed initiative that would make it virtually impossible for state and local government to contract for services with the private sector.
• School Facilities Finance. As proposed by the governor, there would be $8 billion worth of bond measures for school construction in increments through the year 2004. To share in these bonds, local school districts would have to match state dollars. While Cal-Tax historically supports K-12 school construction bonds, it has consistently opposed efforts to reduce the vote requirement for local general obligation bonds from the two-thirds margin because of their direct impact on property taxes. (See December 1997 Cal-Tax Digest commentary entitled "Informing the Local Bonds Debate.")

As the year unfolds, these issues and others will afford exciting opportunities and challenges. 

Larry McCarthy is president of the California Taxpayers' Association