Demand for new taxes in budget dropped

State Democrats and the governor are backing off their demand for a budget that includes new taxes as pressure mounts on lawmakers to pass a spending plan and resume paying California’s bills.

In a confidential e-mail obtained by The Times, Senate President Don Perata (D-Oakland) told fellow Democrats on Thursday night that he had informed the governor “we urgently need a budget -- let’s see if I can work on a deal with the Reps [Republicans] that is no tax, no borrowing. He agreed.”

Perata, who had been leading the crusade for a tax hike in the Legislature, wrote that he anticipated working with Republicans through the weekend in an effort to forge a final deal. His office declined to discuss the e-mail, other than to say talks are ongoing and the Democrats oppose borrowing.

Administration spokesman Matt David said Gov. Arnold Schwarzenegger is on board with plans mapped out in the Senate leader’s e-mail.

“When Sen. Perata offered for the Democrats to work on a compromise budget that did not borrow and did not raise taxes and included budget reform,” David said, “the governor agreed it was the right solution.”

Such a “get-out-of town” budget would probably rely heavily on accounting maneuvers to close California’s $15.2-billion budget gap. It would end the standoff and allow legislators to get back to their districts, where many have reelection campaigns to wage before voters go to the polls in about eight weeks.

Perata and others who have vowed for months that this would be the year when California raised taxes apparently see no other way.

The pressure to pay schools, health clinics, vendors and others reliant on state money is intense 75 days into the fiscal year. Typically, pressures due to late budgets eventually erode lawmakers’ resolve to pass what they view as a responsible fiscal plan. This year’s stalemate has lasted longer than ever.

“When you are at the point where you are reading stories every day about how the stalemate is breaking all records and voters are getting angrier, it is only human for the goal to become not a good budget but any budget,” said Democratic political analyst Darry Sragow.

Perata’s e-mail went to Democratic senators after he canceled a vote on Schwarzenegger’s latest budget plan. The governor pitches the plan as a compromise that meets some of the demands of both Democrats and Republicans. It includes a temporary sales tax hike offset by a steeper tax cut in the future.

But “I told the gov I saw no point in going to the floor only to prove what we all know: Reps won’t go on a tax,” Perata wrote.

While the governor’s office says Perata will accept “budget reform” -- a proposal championed by the governor to constrain future state spending -- the Senate leader’s e-mail is unenthusiastic on the subject.

“The gov still insists on a budget reform amendment as a condition of his signature,” Perata wrote. “We’ll see. As of yesterday morning, he was back to his most draconian version, which is not acceptable.”

Exactly what financial maneuvers legislators could make to wipe out the state’s red ink without taxes or borrowing is unclear. Democrats have vowed never to do it on cuts alone. And Republicans have not demonstrated how the state could cut its way into the black -- their budget proposal includes borrowing.

Likely alternatives involve tax loophole closures, accounting gimmicks and shifting of funds, most of which would not address the state’s chronic financial problems.

There is talk in the Capitol of diverting bond money that voters approved for public works projects in order to balance the budget. Lawmakers supportive of such plans privately say the state would take only funds for projects not expected to get off the ground for years, and the money would be repaid in time to avoid disrupting construction.

Transportation advocates say all the bond money is needed now, and they have launched a campaign to stop lawmakers from raiding it.

Another option that legislators’ staffs are exploring involves increasing the amount of state tax withheld from Californians’ paychecks and refunding the extra withholdings after tax returns are filed. The state could collect large amounts of cash on the interest generated by such a method.

Analysts say such gimmicks are unlikely to go over well with voters.

“It would make the public hate them [legislators] even more,” said Barbara O’Connor, director of the Institute for the Study of Politics and the Media at Cal State Sacramento. “Not that they have far to go.”

A Field Poll released this week shows the Legislature’s approval rating at 15%. And the California Teachers Assn., concerned that lawmakers could resort to borrowing, on Thursday released their own poll of 800 voters that found 67% “agree California has already borrowed too much and that the debt has contributed to the budget crisis.”

Meanwhile, large sectors of state government have scaled back or halted operations amid the impasse. Health clinics and day-care centers have stopped paying staff; environmental projects have been put on hold; child-care facilities are shutting down.

Education officials say that districts have put off replacing as many as 40,000 teachers who retired after the last school year. Summer-school classes were canceled this year in most districts, and the state will not be able to provide the cash needed to pay for special education programs until a budget is passed.

Hopeful that he could pull together a deal this weekend, Perata wrote in his e-mail: “We go to the floor the moment we have mocked-up language ready.”

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evan.halper@latimes.com

patrick.mcgreevy@latimes.com