Major provisions in state's tax relief package.

Despite Measures, California Does Not Conform With Hundreds of Provisions of Federal Law

In the final hours of the 1997 California legislative session, lawmakers agreed upon a major tax relief package targeted at personal income and corporate taxpayers. The package, valued at $1.7 billion over the next three years, was passed nearly unanimously.

The tax package includes the following major provisions in DB-5 (Lockyer/Lewis) and SB-1233 (Lockyer/Bustamante/Pringle):

Dependent Credit Increase

This provision increases the current amount of the credit for dependents from $67 to $222 over three years. The credit will continue to be adjusted for inflation.

According to Sen. Bill Lockyer's office, the median California tax filer (which is a family of four with adjusted gross income of $45,000) will receive a $300 tax cut in 1999 due to the increased credit.

Capital Gains Tax Conformity

These provisions allow taxpayers to avoid taxes on capital gains from the sale of a primary residence, up to $250,000 for singles and up to $500,000 for couples. This applies to all homes sold after May 6, 1997. Homeowners may claim these exemptions every two years.

Subchapter S Corporation Conformity

These provisions conform California law to federal law on Subchapter S corporation changes made to the federal law in last year's Small Business Job Protection Act of 1996.

Alternative Minimum Tax (AMT) Relief

This provision reduces the number of taxpayers required to pay the AMT by increasing the exemption amounts and the exemption phase-out income levels.

The tax, intended to target upper-income taxpayers who qualify for many tax deductions and credits, has begun to capture middle- and lower-income Californians because it has not been adjusted for inflation in a decade.

IRA Conformity

These provisions allow an individual taxpayer to put funds into a Individual Retirement Accounts (IRA) for higher-education expenses, for acquisition of a personal residence by a first-time homebuyer, or for health insurance for self-employed individuals.

The bill also raises the income limits for deducting IRA contributions, and lets individuals withdraw money penalty-free from existing IRAs for certain purposes. This item, which was not contained in any legislation, also conforms on "Roth IRAs."

R&D Tax Credit Conformity

AB-1042 (Wayne) conforms California's research and development tax credit to the changes made to the federal credit by the Small Business Job Protection Act of 1996. The state conformity is effective for tax years beginning on or after Jan. 1, 1998.

Unlike the federal credit, however, the state conformity is permanent and not dependent upon reenactment of the federal credit by Congress. The provisions include an alternative incremental credit and modification of the "start-up" definition. Omnibus Conformity Measure

SB-455 (Alpeft) is this year's overall federal conformity measure. It contains more than 75 provisions that conform California law to selected provisions of the Internal Revenue Code made by the Revenue Reconciliation Act of 1993, the General Agreement on Tariffs and Trade Act of 1994, the Health Insurance Portability and Accountability Act of 1996, and the Small Business Job Protection Act of 1996.

Among the major provisions of this bill are:

* An increase in the small business equipment expensing deduction under IRe, $179 to $13,000 in 1997 and $16,000 in 1998.

* New pension rules, including the creation of SIMPLEs.

* A safe harbor for payment of 100 percent of the prior year's tax for personal income taxpayers' estimated tax payments.

* A new 1 percent tax on the gross income of publicly traded partnerships that elect to be treated as partnerships for California tax purposes.

Bunker Fuels Tax Exemption Extension

AB-366 (Havice) extends for five years until Jan. 1, 2003 the exemption from sales/use taxation for "bunker fuels." This exemption is for the sale of fuel and petroleum products to a water common carrier for immediate shipment outside of California for consumption in the conduct of the carrier's business.

Despite these important tax relief measures, California does not conform with several hundred provisions of federal law after the recent enactment of the Taxpayer Relief Act of 1997. It remains to be seen whether California will conform to these and several hundred other provisions of federal law next year.

Micheli is an attorney and legislative advocate for Carpenter Snodgrass & Associates in Sacramento.