Governor Drops Tax Hike Plan : Facing GOP Criticism, He Tells Legislature to Resolve Shortfall

Feeling the heat from fellow Republicans, Gov. George Deukmejian abandoned his $800-million tax increase proposal Friday, still bitterly insisting that it would have meant only “a temporary minimal adjustment” for taxpayers.

Angry and uncharacteristically animated, Deukmejian relinquished to the Democratic Legislature the immediate responsibility for resolving the state’s $2.3-billion, two-year revenue shortfall. But the governor left no doubt that he expects the Legislature to fail, so he vowed to make ends meet fiscally by cutting deep into the state budget that lawmakers send him for the new fiscal year beginning July 1.

“There will be no actual or perceived tax increase,” he declared, adding for emphasis: “I want to make it absolutely clear, with no ifs, ands and buts about it, that I do not support any general tax increases. I have not in the past, I do not now. . . .”

Sighs of Relief

Deukmejian’s unexpected announcement at a Los Angeles press conference that he was tossing in the towel early in a battle where all the political cards seemed stacked against him prompted private sighs of relief from many GOP lawmakers and public denunciations from Democrats.

“We’ll go back to the drawing board and come up with a proposal we can all accept,” said Senate Republican leader Ken Maddy of Fresno, referring to the GOP, Democrats and the governor.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the budget-writing Ways and Means Committee, charged that Deukmejian had “abdicated his responsibility because he didn’t get a good headline. What kind of leadership is that? It’s a sad, sad thing.”

And state Supt. of Public Instruction Bill Honig, whose office is officially nonpartisan but whose politics is liberal Democratic, said that when the governor proposed his tax increase, “he was right. He should have stuck to his guns and not backed off. The (school) kids will pay the price.”

In his announcement, however, Deukmejian said that “education will continue to be our No. 1 spending priority.”

Deukmejian in recent days had come under increasing pressure from Republicans, who--like himself--have campaigned against tax increases throughout their political careers. GOP legislative leaders privately had advised him that it would be difficult for them to support his plan, the governor acknowledged Friday. And the governor never was able even to find a Republican legislator willing to officially author his proposal.

Beyond Sacramento, Republican strategists nationally had worried out loud that Deukmejian’s proposed tax increase could hurt Vice President George Bush’s campaign in the fall against Massachusetts Gov. Michael S. Dukakis, the expected Democratic presidential nominee. Bush and the GOP have been gleefully watching a $300-million revenue shortfall in Massachusetts in anticipation of using it to undercut Dukakis’ managerial credentials and tar him as a “tax-and-spender” if he is forced to raise taxes.

The revenue shortfalls faced by Dukakis and Deukmejian--and also by New York Gov. Mario Cuomo ($900 million)--apparently all have the same root cause, according to fiscal experts: Overestimates of projected revenues generated by legislation that conformed state tax codes to the 1987 federal tax “simplification.”

Ed Rollins, director of President Reagan’s 1984 reelection campaign, advised Assembly GOP leaders last week that Bush and other Republican candidates could be hurt if Deukmejian pushed his tax plan because it “takes away one of (their) better issues.” Rollins admonished: “Republicans who have fought every tax increase don’t want a tax increase. I think Republicans weaken their hand and I think George Deukmejian weakens his hand.”

On Friday, Deukmejian aides were stunned by an article in the New York Times asserting that the tax plan had “all but eliminated whatever chance remained” that the governor would be selected by Bush as the GOP vice presidential candidate. The article, quoting unidentified Bush aides, added that the tax proposal had “perhaps hurt the party’s chances of carrying (California) this fall.”

Deukmejian--in a more testy version of an answer he has given countless times to the vice presidential question--responded: “Well, I didn’t know I was in the running, No. 1.; No. 2, I am not campaigning for the nomination. No. 3, as I have said, even if I were asked, I could not accept it.”

If he were to be elected vice president, Deukmejian would have to turn over the governor’s office to a Democrat.

Even though it is not in the cards for him to become Bush’s running mate, Deukmejian still is the Republican leader that Bush must rely on most heavily to carry California in November. And by dumping his proposal when he did, Deukmejian now will be able to campaign side-by-side with Bush before Tuesday’s California primary without either politician having to face questions about the GOP governor’s plan to raise taxes.

Deukmejian--together with his immediate staff--is virtually the only politician, Democrat or Republican, who has not characterized his plan as a tax increase. He accused news reporters of “misrepresenting” his proposal and theorized that “Republican legislators and Republican leaders have gotten caught up in the web that was spun by the media.”

One such “caught up” Republican, he said, was state GOP chairman Robert Naylor, a longtime ally of Deukmejian. Naylor had told the Sacramento Bee: “To me, it is clear that it is a tax increase.” And he added, “On the face of it, it appears ridiculous to be rebating $1.1 billion just six months before you have a budget shortfall.”

Deukmejian, asked whether he now was sorry he had returned $1.1 billion in surplus revenues to taxpayers last year, said unhesitantly: “No, no, not at all.” If the money had not been rebated, he said, Democrats merely would have spent it.

On Friday, Naylor said of Deukmejian’s surprise announcement: “I support the governor’s approach. I think it is appropriate.”

Deukmejian’s $800-million tax hike plan had three elements: raising $410 million by suspending for one year the indexing mechanism that keeps taxpayers from being pushed into higher income brackets when they receive cost-of-living pay hikes, raising $250 million by hiking bank and corporation taxes, and raising $140 million by suspending for one year a tax break for money-losing businesses.

Deukmejian said Friday that he did not consider his package a tax increase, in part because somebody who earned the same amount this year as last would pay the same taxes. What the governor did not say, however, is that without his package, this person could receive a cost-of-living increase and still not pay higher taxes. Under Deukmejian’s plan, the chances were good that the individual’s taxes would have risen.

The governor, clearly concerned that his image as a fiscal conservative had been tarnished, said he decided not to keep fighting for his program because practically everyone had been persuaded it was a tax increase. “The bell has been rung. You can’t un-ring the bell,” he lamented.

And what is wrong with a tax increase, if the state government needs one? he was asked.

“What’s wrong with it,” he answered, “is that we have worked very, very hard to see to it that California is competitive. . . . We are a growing state, we have to encourage people who create jobs, who create prosperity, to do it in California. We are in tremendous competition. And one of the worst things you can do is to raise taxes and send out the wrong signal. Those people who are risk takers, they can go to other states where they’ve got lower tax rates.”