Even Worse Budget Woes Predicted

As Assembly Democrats struggled to gain passage of an overdue budget by proposing a massive tobacco tax increase, a letter sent to state agencies warns that layoffs, program eliminations and agency overhauls may be necessary to balance next year’s spending plan.

The letter, prepared by officials at the state Department of Finance, underscores the gloomy fiscal conditions that have contributed to a $23.6-billion budget gap and to analysts’ forecasts of five more years of multibillion-dollar budget shortfalls. It also reflects the fact that state officials have already tapped many of the more attractive deficit-shrinking options, such as loans and transfers, to close this year’s gap.

“It is expected that reductions for the 2003-04 budget will be more complex, [and] require the elimination of programs or layoff of employees,” Finance Director Tim Gage warned in the letter.

To gain passage of the 2002-03 budget, now more than a month overdue, Assembly Speaker Herb Wesson (D-Culver City) on Tuesday proposed more than tripling California’s cigarette tax to $3 per pack--the highest of any state in the nation. He also outlined a plan to levy a 5% tax on satellite television services to raise $55 million.

Wesson floated the hefty tobacco tax increase to replace a proposal to more than double vehicle license fees, which has proved widely unpopular among legislators of both parties. Republicans are calling for spending cuts and Democrats prefer an alternative proposal to tax the rich.

Republican opposition to new taxes to balance the state’s books has given rise to the prolonged standoff over the $99-billion spending package, which was supposed to take effect July 1. Wesson said studies show that when tobacco taxes are raised 10% or more, smoking declines by 4%, suggesting the tax increase would be good public policy.

“This is the only tax that saves lives,” he said.

“This is no drill,” Wesson later warned Republicans. “We will stay here until Christmas. We will fight for this budget.”

The proposal would permanently raise the state’s tax of 87 cents per package to $3--an amount levied only by New York City. In California, the higher tax would be projected to raise $1.7 billion, which when combined with another plan to borrow against the state’s share of the national tobacco litigation settlement means the state would be relying on tobacco-related funds to solve about one-fourth of its $23.6-billion budget hole.

Democrats had previously sought a 63-cent increase on cigarettes to raise $650 million. Wesson said he is comfortable raising more money from smokers to get the state out of the red, as are Gov. Gray Davis and Senate Leader John Burton (D-San Francisco).

“Could I vote for a cigarette tax instead of a [vehicle license fee increase]? Yeah,” Burton said. “But the question is: Are we going to get the bill?”

Assembly lawmakers voted 50 to 23 to make the changes to the tax package, but did not take a follow-up vote Tuesday on the amended spending plan. A vote could come as soon as Thursday.

Assemblyman John Campbell (R-Irvine) said his caucus is pleased that Democrats have agreed to drop their plan to increase vehicle license fees--a move he described as a good start. But he warned that, given the threat of future deficits, cuts are needed to garner Republican support for the spending package.

Campbell also questioned Democrats’ contention that the tobacco tax can save lives and balance the budget.

“If smoking drops off, the state’s position becomes worse,” Campbell said. “So if you don’t smoke, the state is in trouble.”

Democrats contend that their revenue projections take into consideration a decline in smoking triggered by the higher tobacco tax. Tobacco officials warned that the tax increase would drive sales to other sources, such as the Internet.

“It will be a disaster for California’s small businesses,” said Brendan McCormick, a spokesman for Philip Morris U.S.A.

“It will also place an unforeseen burden on a small group of the population.”

Californians between the ages of 18 and 24, young working-class Asians and working-class whites continue to have higher smoking rates than other groups, meaning they could be the hardest hit by the tax increase.

In addition to the tobacco and satellite television taxes, the Democrats’ proposed revenue package also steps up withholding for stock options and bonuses. Schools would receive an extra $481 million under the latest tax plan.

Republicans have called for a spending limit to stave off future deficits and the tax increases they fear Democrats will seek to close them.

State tax collections for May and June are running $650 million below forecast, causing some budget watchers to predict that the $9.8-billion gap projected for next year will more likely range from $12 billion to $15 billion.

The July 31 letter from Gage to agency heads and department directors warns that no money is expected in the 2003-04 fiscal year for new programs or expansion of existing ones.

State agencies and departments, which have already seen their budgets cut by 5% to 25%, are trying to digest an order from the Legislature to eliminate 6,000 vacant positions to save $300 million.

Gage warned in the letter that his department anticipates the need for additional cuts and that agencies and departments should be prepared to submit reduction plans like the ones they turned in last year.

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Times staff writer Carl Ingram contributed to this report.