Activists file suit to block California tax plan

State officials on Tuesday braced for the possibility of delaying tax refunds to millions of Californians, along with student grants and payments to vendors, as the latest round of budget negotiations between Gov. Arnold Schwarzenegger and Democratic legislators collapsed.

With little more than a month’s worth of cash left in the state treasury, the governor and lawmakers have been unable to agree on how to erase a budget gap projected to reach $41.6 billion by the middle of next year. Democrats announced Tuesday that two weeks of discussions had ended in an impasse and sent Schwarzenegger the $18-billion fiscal package they passed last month. The governor vetoed it, as he had promised to do.

State Controller John Chiang has said that as early as Feb. 1, his office may begin issuing promissory notes if lawmakers have not resolved the budget crisis. The state has done this only once before since the Great Depression -- in 1992.

“We have not made any decision about deferring payments or using IOUs, but they are possibilities if the governor and Legislature don’t come to some agreement soon,” Chiang spokeswoman Hallye Jordan said Tuesday.

Under the state Constitution, schools and bondholders get first rights to any cash in the state’s coffers.

Among the first to get IOUs instead of payments would be business and individual taxpayers who are expecting refunds, local governments and recipients of grants from the California Student Aid Commission. Last year, more than 10 million taxpayers received state refunds totaling $8 billion.

Court-appointed lawyers, 1,700 judges, legislators and their staffs would also go unpaid. And officials are preparing to delay a popular program that helps elderly and disabled Californians by paying their property taxes.

Last year, nearly 5,500 homeowners benefited from the 32-year-old Property Tax Postponement Program, which was created to help keep low-income elderly people from being forced to sell their homes or lose them to foreclosure.

California has already suspended financing for public works projects because its dismal financial situation has made investors balk at lending the state money.

In 1992, amid a budget crisis triggered by a deep recession, natural disasters and the Los Angeles riots, California ran short of cash and was forced to send out thousands of IOUs. They resembled checks but included a notice that they could not be paid by California “for want of funds.”

Schwarzenegger and Democratic lawmakers’ inability to break the most recent fiscal impasse was striking, because the two sides had already agreed on the basic outlines of the plan that the governor vetoed. It would have raised $9.3 billion in new and increased taxes on gasoline, sales and personal income and cut schools, health and other state programs.

But Democrats had refused to accede to all of the spending cuts Schwarzenegger demanded, or to his requests that some environmental laws be relaxed and government construction projects be opened to private contractors.

Assembly Speaker Karen Bass (D-Los Angeles) and Senate President Pro Tem Darrell Steinberg (D-Sacramento) told reporters at a news conference that they offered major concessions in all these areas but that Schwarzenegger kept raising new objections.

“These measures would prevent what the governor has called ‘fiscal Armageddon,’ ” Bass said. “However, the governor cannot ward off Armageddon if he keeps moving the goal posts.”

In a letter sent to the Democrats on Tuesday night explaining his veto, Schwarzenegger wrote: “The measures you sent me punish people with increased taxes, but do not make the serious cuts in spending necessary to balance our budget; do nothing to help keep California families working during this recession; and do nothing to help Californians facing foreclosure in this mortgage crisis.”

In the letter, the governor insisted he had never “minced words” about his views of the Democratic plan. But he announced for the first time that he did not support the Democratic proposal to raise the gas tax by 13 cents a gallon.

The Democrats said they were willing to continue negotiations. But even if the governor signed a revised version of the plan into law, it could still unravel in court because of the untested legislative maneuvers Democrats employed to pass the tax increases without a two-thirds vote of lawmakers.

They used a complex strategy that hinges on the legal difference between taxes and fees, and passed the package on a simple majority, without any of the Republican votes they typically would have needed.

Every GOP legislator joined a lawsuit Tuesday intended to nullify the package, which they said violated the provision in Proposition 13 that prohibits a simple majority of the Legislature from passing broad-based tax increases.

“This dishonest effort to raise taxes without a two-thirds vote is a dagger at the heart of Proposition 13 and every California taxpayer,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., which filed the lawsuit in a state appeals court in Sacramento.

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evan.halper@latimes.com

jordan.rau@latimes.com