Wilson Relents on Budget Veto : Finances: Governor returns the $56.4-billion spending plan to the Legislature without his signature. Action allows more time to work out a solution.

Unable to reach agreement on the final pieces of a budget balancing plan, Gov. Pete Wilson relented on his threat to veto the $56.4-billion budget late Wednesday and instead sent it back to the Legislature without his signature.

The action, which came just minutes before a midnight deadline to act on the budget, gives the Republican governor and legislative leaders more time to work out a solution. It also preserves the two-thirds majority votes already cast on the budget bill while delaying its implementation.

Wilson’s decision came shortly after the Senate, on a 28-to-9 vote, approved the latest compromise version of a tax plan that would have closed what remained of a $14.3-billion deficit. The measure would have raised taxes on the state’s wealthiest taxpayers, boosted the corporate tax rate, and imposed a 2% tax on telephone, cable television and other telecommunications services.

In taking the unusual action, Wilson responded to appeals by the Democratic leaders of the Legislature to return the budget to the Assembly, a parliamentary maneuver that skirted the need to veto the spending plan.

Upon hearing from the governor that there would be no veto, Assembly Speaker Willie Brown (D-San Francisco) told the Assembly chamber, “Thank you Mr. Governor. The state of California thanks you. We did not go off the deep end.”

But Assemblyman Richard E. Floyd (D-Carson) said, “Wilson’s a wimp. He blinked.”

Attempts to reach a resolution broke down when Democrats would not yield on demands to reform the workers compensation system. The reform would have lowered costs to businesses but made it tougher for workers to file claims, particularly for stress-related injuries.

Wilson and the Legislature had already missed the start of the fiscal year on Monday, and so were operating for the last three days without a budget.

Legally, the state does not have authority to pay its bills until it gets a budget. But the California Constitution requires the state to continue making some payments, including those to schools and to pay bond debt, and the courts require other payments.

During last summer’s budget impasse, which left the state without a budget for a record 31 days, advocates of the poor won court injunctions requiring the state controller to continue payments for many health and welfare programs. Those court orders are still in effect.

Although some payments will be held up, the next big state payroll is not due until July 15.

Moreover, the state soon will begin collecting on about $5 billion in new taxes that were signed into law under separate legislation. The taxes, which include higher sales levies, will take effect July 15, with or without the budget.

As one official of the treasurer’s office said, “We are awash in money.”

Wilson had said privately that he believed a veto of the budget bill would have caused California’s perfect AAA credit rating to go down. A drop in the credit rating would mean the state would have to pay more to borrow money.

The first-year governor had spent months wheedling, threatening and doing just about everything else he could to get the budget out of the Legislature, along with the spending cuts and tax increases necessary to finance it. It was all done except for the last $2.2 billion in tax increases. But those last few pieces in the puzzle have proven impossible for Wilson to get, particularly after he attached a new condition, the demand for a overhaul of workers compensation.

Earlier, key legislative leaders came up with the $2.2-billion revenue bill Wednesday that raises taxes on businesses and the state’s wealthiest taxpayers.

The plan, which quickly drew opposition from Assembly Republicans was approved on a 5-1 vote by a Democratic-controlled two-house conference committee redoing the tax bill.

The action came on a day when lawmakers hoped to close out the budget debate but instead appeared to be stymied by long-standing political feuds in the Assembly and Senate. The disputes were over taxes and Wilson-backed changes in the workers compensation system that would make it more difficult to collect money for job-related stress.

With the ongoing squabbling, legislative leaders repeatedly put off promised votes on the remaining $2 billion-plus in tax increases needed to balance the budget and erase a projected $14.3-billion deficit.

Wilson, after meeting with legislative leaders, had said he was not enthusiastic about the latest tax plan but said he would consider supporting it depending on the outcome of the workers compensation deal.

Wilson had linked his support for the tax bill with the proposal to lower the premiums businesses pay for workers compensation.

“Without workers compensation reform, I don’t expect to see the votes for an income tax increase, so I will have to veto the budget at midnight,” Wilson told reporters only a few hours before the deadline.

Senate President Pro Tem David A. Roberti (D-Los Angeles) blamed the lack of progress on Wilson’s insistence that workers compensation system reform be part of the budget agreement.

Roberti said: “If we are going to discuss workers comp, it ought to be in the context of reform of the whole health care system.”

The tax plan, drafted by Senate GOP Leader Ken Maddy of Fresno, contains elements of an earlier proposal backed by Wilson and Assembly Speaker Brown, including a personal income tax increase that would affect only the state’s top earners. But it also includes additional provisions strongly opposed by business groups.

These include a hike in the bank and corporation income tax rate from 9.3% to 9.6% as well as a strongly opposed 2% tax on telecommunications services, such as telephone and cable television use.

The problem for Maddy and other legislative leaders is that the plan Wilson supported was so heavily weighted with benefits for business that many Democrats said they would vote against it. “It’s a total giveaway. Business makes out like a burglar,” said Sen. Daniel E. Boatwright (D-Concord), chairman of the Senate Business and Professions Committee. He supports the compromise plan proposed by Maddy.

The newest tax proposals were designed as a substitute for the 2% utility tax and an equally unpopular measure that would require withholding of income tax for independent contractors, ranging from plumbers to doctors, lawyers and accountants.

The proposed income tax hike contained in the Maddy bill would boost the top tax rate from 9.3% to 10.3% for individuals with incomes of $200,000 or couples earning $400,000 or more. The Wilson-backed plan called for a two-step rate hike. It would raise the top rate from 9.3% to 10% on individuals earning $100,000 and couples making $200,000 and to 11% on individuals making $200,000 and couples earning $400,000.

As the midnight deadline neared Wednesday, one deal after another that the Republican governor negotiated in recent weeks with legislative leaders fell by the wayside as rank-and-file lawmakers refused to go along.

Meanwhile, state Controller Gray Davis said the 1991 fiscal year that ended Monday saw the largest drop in revenue since the Great Depression years of 1937 and ’38.

Davis said that during this fiscal year, general purpose state tax revenues were $462 million below the year before, a 1.3% decline.

Many lawmakers on both sides of the aisle had doubted that the governor would jettison the entire budget for the sake of the workers compensation issue. The Legislature and Wilson already have agreed on more than $5 billion in taxes and billions more in budget cuts and accounting adjustments to help erase most of the shortfall.

Still, the latest deal on workers compensation crumbled after the Democratic-controlled Assembly Insurance Committee rejected two versions of the proposal to change the $10-billion workers compensation system.

Democrats said the governor was seeking too much of a rollback in workers rights in exchange for a tax increase that would only be temporary. Republicans complained that the income tax increase for the wealthy was too high a price to pay for a workers compensation deal that could not guarantee reduced premiums for business.

One of the measures rejected by the Insurance Committee was supported by the governor’s Republican allies and was thought to be what Wilson wanted. It failed to get sufficient Democratic votes for passage.

The other bill was a Democratic-drafted measure that fell short of meeting Wilson’s demands.

Times staff writers Jerry Gillam, Carl Ingram and George Skelton contributed to this story.