Assembly Panel Looks for Ways to Raise Taxes

With the possibility that the state may be as much as $3 billion short of what it will need to maintain current government services, the Assembly taxation committee has quietly begun talking about the possibility of massive tax increases, it was learned Tuesday.

A staff memo prepared for members of the Assembly Revenue and Taxation Committee outlines steps lawmakers could take to raise billions in new revenues. Under discussion are increases in a variety of sales, income and other taxes.

The memo, obtained by The Times, reflects concern for many of the same problems facing President Bush and Congress: a softening of tax revenues fueled in part by a decline in corporate profits.

Gov. George Deukmejian, who participated in the first of a series of private budget talks with legislative leaders Tuesday, has said he is willing to discuss a wide range of issues with Democrats, including possible tax increases.

Most of the options outlined in the tax memo, however, go well beyond what Deukmejian is likely to agree to.

Among the options: an increase from 9.3% to 10.3% in the top bracket of the personal income tax, which would raise $1.4 billion; continuation of the special quarter-cent earthquake sales tax hike now scheduled to expire Dec. 31, which would take in an additional $700 million a year, and an increase in business taxes from 9.3% to 11%, which would pad the state’s tax take by $1.1 billion.

The chairman of the taxation committee, Assemblyman Johan Klehs (D-Castro Valley), who said he ordered the memo, said he believes the looming budget crisis will require a tax increase.

“Facts are facts. We have to raise some money to pay for existing services. We have some serious, serious budget problems right now,” he said.

Klehs said that even though Deukmejian and Republican legislative allies may not want to raise taxes, the looming budget problem could force their hand. He noted that the potential $3-billion shortfall is about twice the $1.5-billion deficit that Deukmejian inherited when he took office in 1983.

Turning one of the governor’s favorite phrases around on him, Klehs said, “Deukmejian boasted that he took the state from IOU to A-OK. But now it’s back to IOU. Does he want to leave it that way?”

In order for the state to spend any significant new tax revenues, voters on June 5 would have to approve Proposition 111. That measure, besides raising the gasoline tax to finance transportation projects, also would increase the state spending limit.

Earlier in the day, Assembly Speaker Willie Brown (D-San Francisco), who met with the governor and other legislative leaders over breakfast Tuesday, stopped short of calling for a tax increase. Brown said he will not be prepared to make a concrete proposal until the final budget revenue and expenditure forecasts are released by the Department of Finance in two weeks. But he said if budget shortfall projections stand up, “some form of new revenues” might be necessary.

Although Deukmejian last week reiterated that he has not changed his stance opposing a tax increase, some believe he left the door slightly ajar by indicating a willingness to sit down with legislators to discuss what he called “any number of additional options.”

“I am not going to rule out any options whatever,” Deukmejian said while arguing that he considers a projected 8% increase in state tax revenues a sign that taxes are high enough.

Even though the governor is willing to talk, he made it clear that he wants Democrats in the Legislature, as a first order of business, to agree to talk about suspending legal requirements that force big budget increases for various education, health, welfare and human services programs. Specifically, Deukmejian wants legislation passed providing for the suspension of annual cost-of-living adjustments--so-called “COLAs”--for various programs whenever there is a budget crunch.

Tuesday afternoon, Deukmejian met privately with Republican lawmakers to explain his plan.

Republicans emerged from the meeting indicating they support Deukmejian’s proposal and expressing opposition to a tax increase.

Assembly Republican Leader Ross Johnson of La Habra said “there is zero sympathy” among Republicans in the Legislature for a tax increase. Assemblyman Stan Statham (R-Oak Run) said all the Republicans attending the meeting agreed on “the seriousness” of the budget problem and were prepared “to hold the fort” with the governor.

The budget problem stems from estimates that tax revenues during the current budget year are off by about $500 million. In addition, an unexpected surge in pupil enrollment may push the cost of supporting the public schools up by as much as $400 million.

Even before that double dose of bad news, Administration and legislative budget officials said tax revenues would leave the state at least $1.6 billion short of what it would need to meet its legal spending requirements, keep up with normal growth of prison populations, school enrollments and human services programs and replenish the state’s $1-billion reserve. Other estimates put the gap between revenues and existing services at $1.9 billion.

Over breakfast Tuesday, Deukmejian and legislative leaders held the first of a series of meetings aimed at resolving the budget problem.

Deukmejian’s spokesman, Robert J. Gore, said the governor hopes the meetings will lead to “a negotiated budget settlement.”

Times staff writers Daniel M. Weintraub and Mark Gladstone contributed to this story.