Governor to Seek Tax Increases and Cuts in Spending

Gov. George Deukmejian has put together a fiscal rescue plan that would make up for a nearly $2-billion income tax revenue shortfall by increasing taxes, cutting spending and reducing the state budget reserve, The Times learned Wednesday.

Deukmejian told lawmakers in a closed-door meeting that he is ready to go with a plan that will:

-- Require state agencies to take a 2% budget cut for the fiscal year that will begin July 1 and make other cuts to save an expected $500 million.

-- Conform state corporate tax codes to changes in the federal tax laws enacted by Congress last December. That move, which would result in a corporate tax hike, is expected to bring in an additional $250 million.

-- Reduce the proposed budget reserve from $1 billion to $700 million for a $300-million savings.

-- Freeze tax rates and certain fees at current levels rather than allowing them to be indexed to inflation. That could save $400 million by suspending indexing of income taxes and freezing motor vehicle license fees that normally decline yearly.

-- Inflate current revenue projections by $400 million based on expectations of a stronger economy in 1989.

Meeting With Republicans

Deukmejian outlined his program during a lengthy private meeting with Republican legislators Wednesday. He is expected to make the plan public today.

According to one participant, the plan “makes sense and is something we can all live with.”

Earlier Wednesday, Deukmejian, whose trademark political boast is that he has kept the state budget balanced over the last six years without a statewide tax increase, told reporters, “We are going to be looking at everything.”

Before learning of Deukmejian’s plans, lawmakers were already debating the prospect of deep budget cuts or tax increases.

Democratic lawmakers said they will fight budget cuts but probably back Deukmejian if he supports a tax increase.

Sen. Alfred E. Alquist (D-San Jose), chairman of the Senate Budget and Fiscal Review Committee, called a tax increase “almost inevitable” because of the need to raise substantial amounts of money to keep the governor’s proposed $44.3-billion state budget in balance.

“Whether you call it a tax increase or call it a readjustment or a correction of past mistakes--I think it has to be done,” said Alquist, who also predicted that virtually no new spending will be approved in the budget this year.

Assembly Ways and Means Chairman John Vasconcellos (D-Santa Clara) said he will battle budget cuts: “Services can’t be cut. They are essential.” Vasconcellos said he will continue to push for increases in state spending on AIDS, senior citizens, health, education and other programs. To underscore his point, later in the day he proposed adding $52.8 million to the budget for AIDS prevention, education, treatment and research programs.

Republicans, on the other hand, said they want budget cuts, not tax increases.

‘Golden Opportunity’

Assemblyman Dennis Brown (R-Signal Hill), chairman of the Assembly Republican Caucus, which has consistently fought efforts to raise taxes, said, “This is a golden opportunity to cut some unnecessary and wasteful parts of government. Republicans in general would be very hesitant to change the tax laws unless we can be absolutely convinced that there is some good reason to do it.”

Areas of the budget the GOP lawmaker said are ripe for cutting are the $6-billion Medi-Cal program, a medical services program for the needy, and the $4.5-billion Aid to Families with Dependent Children program.

Sen. Ken Maddy of Fresno, the Republican leader of the Senate, said it is still not clear whether the $1-billion drop in income tax revenues this year will reoccur next year, producing a $2-billion shortfall, as Deukmejian Finance Director Jesse R. Huff anticipates will happen. “If it is a one-time glitch, I don’t think we’ll get support in the Legislature for an overall tax adjustment-tax increase,” he said.

Further complicating the picture Wednesday was the assessment by Legislative Analyst Elizabeth G. Hill, the Legislature’s nonpartisan budget analyst, that even if a political consensus is reached for a tax increase, the state might not be able to spend the money.

May Be Boxed In

Hill told legislators at a joint Senate-Assembly budget committee hearing that the state may be boxed in because of the complicated limit on state spending that voters put into the California Constitution in 1979.

She said the $44.3-billion budget for the fiscal year beginning July 1 already pushes state expenditures right up to the spending ceiling. If Deukmejian uses up all of his $935-million budget reserve to make up for the expected $1-billion shortfall in the current year, he will not be able to replenish it because there is not any room under the limit, Hill said.

That problem, however, could be erased if one or both of the spending limit propositions on the June 7 primary election ballot are approved by voters. The two measures, Propositions 71 and 72, would raise the limit and allow more room for spending.

If the two measures do pass, it will be over the opposition of Deukmejian. Last Friday, Deukmejian came out against both ballot measures.

Rebate Last Year

Only last year, Deukmejian and the Legislature agreed to income tax rebate legislation that returned $1.1 billion to California taxpayers. The governor said he was required under the voter-approved spending limit to rebate the money because of a $1.1-billion surplus in last year’s budget.

At the same time they were preparing the rebate, Deukmejian and lawmakers also drafted the legislation overhauling state income tax codes. The intent was to make state tax codes conform to changes in federal tax law that went into effect in 1986 in a way that was “revenue neutral,” meaning the state would neither gain nor lose tax revenues.

Deukmejian said Wednesday it is obvious something went wrong with the tax legislation, even though his staff still is unable to pinpoint causes for the dramatic turnaround in state tax receipts.

“It now begins to appear that (the tax bill) wasn’t revenue neutral, that actually the results are that it has caused a reduction in revenue. So we’ll have to look at trying to correct that,” Deukmejian said in a roundabout way of saying that taxpayers might have gotten an unexpected tax cut last year and that what went down may now go up.

Deukmejian said the budget problem represents “a very difficult situation for me and for all decision makers. Unfortunately, this happened late in this fiscal year. It came very suddenly, totally unexpected by everyone.”

Not knowing exactly what caused the shortfall is making it difficult to come up with a solution to fix it, the governor said.

“It is very difficult for us to make sound, thoughtful judgments on what changes, if any, should be made on that tax reform legislation because we don’t have all the answers yet,” Deukmejian said.