Deficit Seen Likely to Deepen Cuts in Service : Budget: Wilson’s $7-billion plan to boost revenue is as far as he intends to go, finance director says.

State Finance Director Thomas W. Hayes on Monday confirmed reports that the state’s budget deficit had increased by nearly $2 billion and could grow even larger, but said the governor would recommend no further tax increases to make up for the shortfall.

That could mean even deeper cuts in services than what Gov. Pete Wilson has proposed to resolve what Hayes says is a potential $14.3-billion deficit.

“We are basically aiming at a moving target,” Hayes said during a briefing to lawmakers on a two-house budget conference committee.

Wilson has proposed about $7 billion in tax increases, including a 1 1/4-cent increase in the sales tax, an increase in motor vehicle license fees, and new taxes on newspapers, magazines, candy, snack foods and other items. Hayes said that is about as far as Wilson plans to go.

Asked about the possible support for a Democratic-backed plan to raise the top state income tax rate for the state’s wealthiest 1% of taxpayers, Hayes said: “I don’t believe that that’s in the cards. I think the governor has gone as far as he believes is prudent on the tax side.”

The finance director, a Wilson cabinet adviser, said the governor is concerned about the impact of further tax increases on California’s struggling economy.

Hayes indicated that Wilson will try to make up the difference through further budget cuts. “We are going to have to look for further reductions, as painful as they are,” Hayes told reporters. So far, Wilson has outlined nearly $5 billion in proposed cuts.

That creates the possibility of another confrontation between Wilson and Democratic budget writers, who all along have been pressing for a solution that contains at least a 50-50 split between tax increases and budget cuts.

The Democrat-dominated conference committee, anticipating the bad news, had worked up a preliminary budget proposal based on a $14-billion shortfall. But that proposal would raise taxes by $8 billion and has been rejected by Wilson.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee, said: “I hope there are no ultimatums. We need a budget agreement by the end of this week and that will require everyone to remain fluid.”

Because the Legislature counts expenditures differently from the Administration, Vasconcellos said he thinks the true budget shortfall is around $15 billion.

Wilson, in April, shocked the Legislature by announcing that the state faced a $12.6-billion deficit.

But Hayes has since told legislators that expected state revenues have declined an additional $1.7 billion. About $500 million of that loss, Hayes said, was due to a court decision last year that prevented the state from charging a sales tax to defense contractors working for the federal government.

“It is not a pretty picture,” Hayes said. “We have been working basically around the clock trying to just get our arms around it (the size of the deficit) and it keeps moving even as we put the numbers together, so we will be here to work with you as much as I can.”

Hayes said he will release full details of the updated expenditure-and-revenue picture today.

While Administration officials and lawmakers were grappling with the budget problem inside the Capitol, various groups were generating additional political pressure outside.

A crowd of about 3,000 supporters of state mental health programs gathered for a rally designed to shore up backing for a plan that would transfer responsibility for state programs to counties--along with tax sources to pay for them.

About 11 busloads of demonstrators from Los Angeles arrived outside the Capitol early in the day to join the protest. Organizers said the buses left Los Angeles Sunday night and would return Monday afternoon.

Richard Van Horn, head of the Los Angeles County Mental Health Assn. and an organizer of the rally, said the deficit put mental health programs and other state programs in jeopardy.

Earlier, more than 40 groups representing public employee unions, hospitals, senior citizens, the poor, and a wide variety of government organizations kicked off a statewide campaign that they hope will persuade the Legislature to raise taxes rather than make additional budget cuts.

The groups, called the Coalition for a Better California, said they had already distributed 150,000 postcards aimed at legislators who are opposed to tax increases.

Sister Sheila Walsh, speaking for an advocacy group for the poor known as Jericho, argued that the additional $2-billion budget shortfall announced by Hayes “can’t be made up with cuts. The money is there to fund basic services if our elected leaders have the will to close special interest loopholes and end tax privileges.”