Higher Tax Levies of $800 Million Get Cool Reaction

Gov. George Deukmejian released a $2.3-billion fiscal rescue plan Friday, one that calls for $800 million in higher tax levies on Californians and $450 million in budget cuts.

On paper, the governor saves another $500 million by reducing next year’s proposed budget reserve from $1.1 billion to $600 million. He optimistically predicts the balance sheet will be further improved by a stronger than expected economy that will bring in an additional $500 million.

Such optimism is risky. The current problem in part is due to optimistic revenue projections by the Deukmejian Administration that did not foresee a drop of more than $2 billion in income tax receipts during the current and upcoming budget years.

Even before Friday’s formal annoucement of the plan, Republican legislators who had received verbal briefings about the proposal late Wednesday said they would have trouble supporting Deukmejian’s tax proposals.

Picks Up Critics

Deukmejian’s fiscal program picked up more critics Friday after the full plan was released.

Senate President Pro Tem David A. Roberti of Los Angeles, while saying “we will work with the governor,” termed “unfair” a Deukmejian proposal to suspend a tax provision designed to shield taxpayers from the effects of inflation.

The Deukmejian proposal would allow the state to collect an additional $410 million in income taxes by suspending for a year the indexing mechanism that prevents taxpayers from being pushed into higher brackets by pay increases meant to offset the effects of inflation.

The governor’s plan would also bring in $250 million by increasing bank and corporation taxes and $140 million by a one-year suspension of a tax break for money-losing businesses.

Major budget cuts include a six-month postponement of cost-of-living increases for welfare recipients and a 2% reduction for nearly all state operations and programs.

State Supt. of Public Instruction Bill Honig said Deukmejian’s plan will hurt public schools despite the governor’s promise in a statewide radio and television address Thursday to protect kindergarten through high school programs.

“Education is being hit with $50.7-million worth of cuts,” Honig protested. “The cuts mean that schools in California will continue to slip relative to the financial support school systems in other states are receiving. We are still going backwards.”

Welfare Recipients Cut

One of the most controversial proposed budget cuts in Deukmejian’s plan appeared to be a recommendation to reduce scheduled increases in monthly allowances for welfare recipients by half. The new budget would give persons receiving allowances under the $4.5-billion Aid to Families with Dependent Children program a 4.1% hike, reduced from a scheduled 4.7%, but the increase would take effect Jan. 1, 1989, instead of July 1 of this year.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee, said it is “utterly shocking and unforgivable to take away money for food for poor kids to cover revenues we were supposed to receive from wealthy Californians.”

Deukmejian, who was in Los Angeles to sign legislation allowing law enforcement agencies to tap phone lines of crime suspects, would not comment on the budget plan.

Details of the governor’s plan were released by state Finance Director Jesse R. Huff, a member of Deukmejian’s cabinet and his chief budget adviser.

Huff said the governor wants to “spread the impact” of the income tax shortfall “over a variety of areas.”

“There are no Draconian reductions . . .,” Huff said.

As Deukmejian did on Thursday, the finance director described the tax features of the plan as “adjustments” to last year’s sweeping tax reform bill and disputed characterizations by both Republican and Democratic legislators that the proposals represent a “tax increase.”

Huff, while steadfastly refusing to concede that the proposal to suspend income tax indexing would raise individual taxes, did acknowledge that if Californians “receive a pay increase” this year “of course, they will receive an increased tax bill (for 1988).” The proposal will require legislative approval.

Another of the tax proposals requires enactment of a bill pending in the Legislature that would raise $250 million in bank and corporation taxes by adjusting state business tax codes to changes in federal law that went into effect last year. The changes involve ending favorable tax treatment for such things as vacation time that corporations carry forward for employees.

‘Will Sign It’

Huff said, “Our revenue estimate is predicated on the assumption that the Legislature will pass that bill.” Huff said that if the bill is sent to Deukmejian, “the governor will sign it.”

But that remains to be seen.

The tax legislation is being carried by Sen. John Garamendi (D-Walnut Grove), chairman of the Senate Revenue and Taxation Committee. On Thursday, Garamendi said he did not plan to carry the governor’s bill.

Deukmejian Chief of Staff Michael R. Frost, angry over Garamendi’s announcement Thursday, said Friday that if the Legislature does not send Deukmejian the $250-million bank and corporations tax bill, the governor “will have to find the money somewhere else,” meaning budget cuts.

The third tax change sought by the governor would raise another $140 million by suspending for one year a provision of the business tax that allows corporations to carry forward losses from one year to the next, rather than taking all the losses in a single year. The legislation was enacted to allow businesses that experience widely fluctuating swings between profit and loss, like farming, to spread their losses over a period of three years.

As for the budget cuts, the largest trims would be in health and welfare programs, which would lose about about $96 million. Funding for the state prison system would be reduced by about $40 million.

School Reductions

The $50-million reduction in schools would come in part from elimination of $10 million that was being provided to upgrade textbooks, a reduction of $5 million in a program for mentor teachers, and elimination of $20 million in extra funding the state was going to provide for poorer school districts.

The overall budget reductions, spread out over two years, would total $150 million during the current budget year, which ends June 30, and $300 million in the new fiscal year that will begin July 1.

Huff said most of the current year’s savings would come from deferring planning expenditures into the next fiscal year and capturing any unused budget allocations.

After the smoke clears from the various cuts and additions, the overall budget will grow slightly, from $44.3 billion to $44.5 billion.

The budget was allowed to grow because of the higher tax levies that would be enacted. Huff also said unavoidable expenditures in next year’s budget are pushing up spending by $250 million.