State tax increase aimed at wealthy

Democratic lawmakers presented a plan late Tuesday night to impose $9.7 billion in new taxes on the wealthy and corporations to avoid the cuts to government services in Gov. Arnold Schwarzenegger’s budget plan.

Republicans, who hold enough votes to block a budget from passing, vowed to fight it.

But a week after the state blew its deadline for enacting a spending plan, the proposal offers the first glimpse at how the Democrats who control the Legislature would go about eliminating a deficit that has soared to $15.2 billion.

Most of the new revenue would come from an income tax hike.

A dependent-care credit currently available to all Californians also would be eliminated for families with an income of more than $150,000.

“Californians want this budget mess fixed,” said Assembly Budget Committee Chairman John Laird (D-Santa Cruz). “This, in essence, fixes California’s budget problem. Any other alternative keeps deficits going into the future and balances the budget on the backs of school kids, health clinics and transit riders.”

Income taxes on families earning more than $321,000 would go up by 7.5%. Joint filers earning more than $642,000 would see an 18% hike.

The proposal also includes an amnesty intended to entice tax cheats to pay up, the suspension of various tax breaks for corporations and the restoration of a franchise tax on businesses.

Democrats are presenting the plan as an alternative to billions of dollars in cuts to schools, healthcare and other services proposed by Schwarzenegger.

They argue that it would allow the state to avoid thousands of teacher layoffs, big cutbacks in the Medi-Cal health insurance program for the poor and reductions in home assistance for the elderly and disabled.

Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks) said Republicans are “categorically opposed” to the broad-based tax hikes and predicted they would be defeated in floor votes.

The plan was nonetheless approved Tuesday on a party-line vote by a joint budget panel.

Although the panel waited until late Tuesday night to address tax issues, for weeks it had been going through every line item in the governor’s budget and voting along party lines to reject most of the cuts.

As it moved toward rejecting $1.5 billion in cuts to schools proposed by the governor, Niello protested that “what we are essentially doing here is handing out false hope.”

The Democratic budget plan now goes before the full Assembly and Senate.

Legislative leaders, meanwhile, will continue closed-door negotiations with the governor in the hopes of reaching a compromise.

Lawmakers have been slow to address the state’s budget problems this year, but pressure is mounting for them to break the stalemate.

The state does not have enough cash to pay its bills past September, and finance officials have warned that, without a budget in place, California may not be able to borrow the money needed to stay afloat until the usual flood of tax receipts arrives early next year.

Officials at the state treasurer’s office have advised lawmakers that a cash crisis is possible if there is no budget by Aug. 1 because it takes at least a month to line up the borrowing.

Schwarzenegger spokesman Aaron McLear said that although the governor is opposed to tax increases, he is pleased to see the budget process moving forward.

“The governor doesn’t believe that raising taxes is the way to go in this challenging economy,” McClear said.

“But, as he has said, it is important that everything be on the table. . . . Now Republicans and Democrats must come together and finalize a balanced budget immediately before the state runs out of money.”

As GOP lawmakers warned the new income taxes would encourage business owners and the wealthy to move elsewhere, Democrats defended the tax increases as consistent with action the state has taken in the past.

They noted that raising the tax paid by high earners from the current top rate of 9.3% of income to as much as 11% is exactly what the state did during the budget crisis of the mid-1990s, when Pete Wilson was governor.

“These are really just rolling back tax cuts that have been made,” said Senate Budget Committee Chairwoman Denise Moreno Ducheny (D-San Diego).

But critics of the proposed income-tax increases point out that the wealthy have already been hit with a substantial tax hike: a 1% surcharge the state began tacking onto all income above $1 million after voters approved Proposition 63 in 2004.

That tax money is being used to fund an expansion of mental health services.

The wealthy “aren’t locked in to being here in California,” said Senate Budget Committee Vice Chairman Bob Dutton (R-Rancho Cucamonga).

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evan.halper@latimes.com