If state’s numbers don’t come up, bet on a sales tax hike

In his latest plan for closing a budget shortfall now estimated at $17.2 billion, Gov. Arnold Schwarzenegger will propose giving voters a choice between borrowing against the state lottery and paying more sales tax.

The sales tax proposal is a turnabout by Schwarzenegger, who came to office as an anti-tax crusader and throughout his tenure has steadfastly insisted he would never consent to new taxes. In recent days, the administration repeatedly denied reports that it has been laying the groundwork for a sales-tax increase.

Deep cuts in services would still be needed to balance the budget. According to advocates and lobbyists briefed by the administration, Schwarzenegger will propose reducing health services for the poor even further than he had suggested in January, in his initial spending plan.

At the same time, he is walking away from some cuts he proposed then that triggered loud howls of protest.

Administration officials, who requested anonymity so they wouldn’t upstage the governor, said the latest proposal restores billions of dollars in school spending and abandons plans to close 48 state parks and release tens of thousands of prisoners early.

The governor’s new plan, to be released today, has already drawn resistance from GOP lawmakers, who have pledged to vote against any new taxes.

The lottery proposal, according to administration officials, would come before voters as early as November and hinges on administration estimates that California could borrow against future profits to generate as much as $15 billion over three years.

The governor also will propose changes to the lottery intended to lure more gamblers, such as increasing payouts and updating the games offered by the state to include blackjack and poker themes.

Under the plan, if voters rejected the borrowing, or if the proposal fell through for any other reason -- such as lawsuits or lack of a viable lender -- state sales taxes would automatically increase by 1 cent to cover the loss.

The sales tax increase would stay in effect until the state’s finances were out of the red, for up to three years. A 1-cent sales tax increase would generate roughly $6 billion per year, according to state statistics.

Republican lawmakers, who support squeezing more cash from the lottery to help close the budget gap, said the governor’s plan to link it to a sales tax is a deal breaker.

“This is not something we can support,” said Assembly Republican Leader Mike Villines of Clovis. “The lottery is a great asset that we can use to pay down debt, but tying that to a tax increase is fundamentally the wrong way to go.”

The tax trigger would not go before voters but would need approval by two-thirds of the Legislature, requiring the support of at least eight Republicans.

Administration officials defend their plan as a responsible way to bring long-term balance to state finances.

They note it includes spending restraints, which would also go before voters, that would force the state to put billions of dollars into a rainy-day fund. It also would refund some of the new sales taxes if the state began generating budget surpluses.

Democrats say they will keep an open mind. State Sen. Darrell Steinberg (D-Sacramento) said the state will need even more new revenue than Schwarzenegger is proposing.

“But we may not have the luxury of discounting any potential source of revenue to avoid devastating cuts,” Steinberg said.

A similar plan was enacted under former Gov. George Duekmejian in the early 1980s. But voters never had to pay the tax because revenues picked up and the state made its way out of the red before the 1-cent sales tax kicked in.

Schwarzenegger’s proposal may be more likely to hit voters in the wallet.

It is linked to changes to the lottery that could run into legal trouble and resistance from well-funded gambling interests that could finance a significant campaign against competition from an expanded lottery.

Some of the biggest new cuts in the governor’s budget are aimed at Medi-Cal, which provides healthcare for the impoverished, including people receiving in-home support services.

The January version of the budget had $4.7 billion in healthcare cuts, including termination of Medi-Cal coverage for dental work and optometry, and increases in premiums for the state’s Healthy Families program.

Healthy Families provides medical care for about 800,000 children whose parents earn more than the poverty level but still are low-income.

The changes restrict eligibility for these programs. But defenders of in-home supportive services, which the governor has selected for cuts in the past, have noted that it is far cheaper to care for ailing people in their own homes than to put them in nursing homes.

The administration sought to brace healthcare advocates in a private briefing Tuesday. Aides to the governor said they have not given up trying to expand healthcare in California -- the goal of a $14-billion Schwarzenegger proposal that the state Senate rejected in January -- but it would have to wait at least until next year, according to people at the meeting.

Healthcare advocates said they were not assuaged and plan to loudly criticize Schwarzenegger’s proposal when it is formally released.

Schwarzenegger’s decision to drop his prisoner release plan will allow him to avoid continued protest against it. The proposal infuriated law enforcement and victims’ groups, and no state legislator has agreed to sponsor it in the nearly five months since he offered the idea.

Matthew Cate, Schwarzenegger’s newly appointed secretary of corrections, said projections for the state prison and parole population had fallen enough that the early release plan was no longer needed to save money.

“We agreed the first thing we’ve got to do is take the early release off the table,” Cate said. “We’ve got a golden opportunity here to do that, and that’s what we’ve done.”

Since January, the state has cut its projection for the prison population next year from 177,000 to nearly 171,000, and the estimated number of those on parole was cut from 133,000 to 123,000.

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evan.halper@latimes.com

jordan.rau@latimes.com

Times staff writer Michael Rothfeld contributed to this report.