Bill granting municipalities income tax authority narrowly advances. (Up Front).

The state Assembly last week passed a controversial bill giving cities and counties the authority to put local income tax measures before voters in their communities.

The bill, AB 1690 by Mark Leno, D-San Francisco, would give local governments the long-sought power to raise revenues without depending on the whims of state lawmakers. In exchange, local governments would have to set aside existing property tax dollars for public safety.

The proposed law, which squeaked out of the Assembly with a 41 to 30 vote, must still clear the state Senate and get Gov. Gray Davis' signature.

It has generated substantial opposition, and not just from anti-tax advocates. Local government lobbyists have expressed concerns that it will create inequities in local government finance, with some communities more predisposed towards these new levies than others.

Business groups oppose the bill because it would add another level of taxation on small businesses, most of which pay their taxes through the income taxes of their owners. Also, it would create an income tax hodgepodge, with different communities having different income tax rates.

Leno's bill, which was sponsored by the California Professional Firefighters Association, would set up a complex system for local governments to raise income taxes. First, a local legislative body -- either a city council or county board of supervisors -- would decide to put a local income tax measure on the ballot.

The amount of the tax would be based on a series of formulae, but it could not exceed 8 percent of the net income tax an individual owes to the state. The state would collect the local tax through a special deduction line on the state income tax form and then return that money to local governments.

Local government lobbyists are concerned that such a process would further tempt the state government to take more local government revenues to balance its own books.

In essence, opponents say, the bill allows the state to pass off the responsibility for raising taxes to balance its books onto local governments. "It's obfuscation, pure and simple," said Stephen Frates, professor of state and local government with the Rose Institute at Claremont McKenna College.

But Leno said the state already has taken away revenues from local governments without giving any authority to those governments to offset those losses.

"City and county governments have very few options right now to take control of their own destinies," Leno said. "And they have more and more people in need of the services they provide. It's a recipe for disaster."

Another concern is that the bill would set up a patchwork of local government taxes that could prompt high-income individuals and small business owners to relocate to cities and counties without income taxes.

Leno disputed this, saying that the average additional income tax that an individual would have to pay is $70. But opponents say that the average hit for small businesses would be higher. According to the California Franchise Tax Board, about 80 percent of all businesses in the state are sole proprietorships, partnerships, limited liability corporations or S corporations. In all of these types of businesses, the revenues pass directly through to the owners, who then pay state income taxes on those revenues.

"We already hammer small businesses now with some of the highest income taxes in the nation," said Larry McCarthy, president of the California Taxpayers Association. "This would only aggravate the situation."