Legislature Ends Budget Deadlock : Government: Tax hike for the wealthy and curb on workers’ compensation are passed. Wilson signs the $56-billion spending measure minutes before deadline.

Ending a partisan stalemate over the state budget, lawmakers on Tuesday night sent to Gov. Pete Wilson legislation to raise taxes on the state’s most affluent residents and to limit the right of workers to collect disability payments for stress suffered on the job.

Passage of the tax and workers’ compensation legislation prompted the governor to sign the $56-billion budget that has been on his desk for nearly a month. A Wilson spokesman said the governor vetoed about $200 million from the spending plan and signed it minutes before a midnight deadline.

“I’m delighted to finally have this process come to an end,” Wilson said as he signed the budget in his Capitol office. He called the spending plan “a fair and a wise budget which represents fair and wise compromises.”

The budget deadlock ended when some Republicans, prompted to compromise by passage of the workers’ compensation bill, dropped their opposition to the $2.3-billion measure that will raise income taxes on those earning more than $100,000 a year. Wilson said the tax increase was needed to balance the budget, but had linked its approval to his demand that employers be granted some relief from ever-increasing workers’ compensation insurance premiums.

The workers’ compensation measure will sharply limit the right of short-tenure workers to be compensated for stress, but it falls far short of what Wilson and some Republicans initially demanded.

After Wilson signaled that he would approve the workers’ compensation measure, the Assembly promptly took up the tax bill--the last major piece of the governor’s plan to bridge the state’s $14.3-billion budget gap. The measure initially fell four votes short of the two-thirds majority needed for passage. But ultimately three Democrats and one Republican added their support to pass the tax hike on a 54-22 vote. The Senate later voted 27 to 11 and sent the bill to Wilson’s desk.

“The governor’s deal on workers’ compensation is the best deal that he’s going to get,” said Assemblyman Charles W. Quackenbush (R-Saratoga) after voting for the income tax bill. “The governor is asking us (Republicans) to help him bridge the rest of the gap, so we are going to help him out.”

Other Republicans ridiculed the agreement as a capitulation by Wilson.

Together, the Senate and Assembly actions resolved the problem that has preoccupied the Wilson Administration since the governor took office in January. Wilson faced a midnight deadline to sign or veto the spending plan or return it to the Legislature.

Already enacted were more than $5 billion in new taxes, including a 1 1/4-cent increase in the sales tax that took effect Monday. Also included in the overall budget agreement was legislation to cut welfare benefits by 4.4% and suspend for five years automatic cost-of-living increases for recipients of welfare and other social services.

The tax measure approved Tuesday night would raise the top personal income tax rate from 9.3% to 10% on single filers earning at least $100,000 a year and couples making more than $200,000. Individuals earning $200,000 or more and couples making more than $400,000 would pay a top rate of 11%. These provisions would be automatically repealed in five years.

The bill also would phase out some deductions for upper-income filers and conform the state tax code to federal law. In addition, it would suspend for two years and then reinstate a tax break for business that allows companies to carry forward their operating losses into future years and use them to offset taxable income.

Finally, the measure for the first time would establish a means test for the renters’ tax credit. The credit would be available only to individuals earning less than $20,500 a year and couples making less than $40,500.

Despite the earlier agreement on the bulk of the new taxes, Wilson, backed by Assembly Republicans, engaged in a lengthy standoff with Democrats over the issue of workers’ compensation. The governor said he would not sign the budget for the fiscal year that began July 1 without major changes in the law governing stress benefits. Democrats refused to give the governor what he wanted.

But as state workers began to go without their paychecks and the financial houses considered lowering California’s bond rating, Wilson changed his tack, scaling back his proposal.

He had insisted on a measure requiring workers who seek disability benefits to prove that at least 50% of their stress was caused by the job. The current threshold is 10%. He also wanted to prohibit compensation for stress that arises out of a firing, layoff or other legitimate personnel action, including discipline, transfers and evaluations.

Assembly Democrats had agreed to require workers to prove that at least 30% of their stress came from the workplace. They also consented to a provision denying benefits for stress caused by a layoff or firing. But they threw in a new element, proposing to repeal a decades-old law that inhibits price competition among workers’ compensation insurers and guarantees that about one-third of the premiums goes to pay for overhead costs.

That proposal drove a wedge between employers, who were seeking lower premiums, and insurers, who said they would oppose any workers’ compensation measure that repealed the so-called minimum rate law. Insurers lobbied heavily against the proposal and encouraged employers and organized labor to develop a new compromise that did not include it.

The compromise, embraced by Wilson, leaves untouched the stress provisions over which the governor and the Assembly Democrats had been struggling. Instead, the bill denies workers the right to collect stress benefits in their first six months on the job unless their stress is caused by a “sudden and extraordinary” employment condition. About 12% to 15% of stress claims are filed by workers with less than six months on the job, experts said Tuesday.

The bill also extends the life of a commission that is studying the repeal of the minimum rate law as a way to inject more competition into the marketplace.

The restriction on stress claims is expected to save employers about $60 million a year, less than 1% of the $10 billion workers’ compensation system. Wilson’s earlier proposal, had it been enacted, was expected to save business about $220 million. One big business group, an association of firms that insure themselves for workers’ compensation, said the deal was too weak to be praiseworthy.

“This bill is so narrow that it is amazing we are even calling it workers’ compensation reform,” said Susan Cavazos, chairman of the board of the California Self-Insurers Assn. “When you have horse manure, let’s call it that and not try to make it into perfume. This is not perfume.”

Several Republican lawmakers also mocked the compromise and some suggested that Wilson had wasted his time in delaying the state budget for 16 days to accomplish what they considered very little.

“This is a small fig leaf to cover up a very big tax increase,” said Assemblyman Tom McClintock (R-Thousand Oaks).

The reception was not much better in the Senate, where Republican leader Ken Maddy of Fresno, a close ally of the governor throughout the budget negotiations, called the final deal “a joke.”

But most of the critics voted for the bill as it passed the Senate 29 to 2 and the Assembly 66 to 7. A spokesman for the governor insisted that the bill was meaningful, even if it was modest.

“We pushed as hard and as long as we possibly could,” said Bill Livingstone, Wilson’s press secretary. “We were able to get substantial reforms. It’s not everything we wanted, obviously. There just isn’t time to get additional reforms. But we have elevated this issue statewide and it is not going to go away.”

Meanwhile late Tuesday, critics of Wilson’s plan to create a California version of the Environmental Protection Agency made an unsuccessful attempt to derail the proposal. The new Cal/EPA is designed to streamline the state’s environmental bureaucracy, placing some, but not all, of the regulatory programs under a secretary for environmental protection appointed by the governor.

Under the unusual provisions of the executive reorganization statute, the governor’s new agency automatically was born early today when neither the Senate nor the Assembly voted to reject it.

The plan, a keystone of Wilson’s campaign last year, has proved to be controversial, especially among conservative Republicans and lawmakers of both parties from heavily agricultural districts. These opponents objected to removing the regulation of pesticides from the generally pro-farming Department of Food and Agriculture.

Environmentalists criticized the plan for different reasons. They faulted Cal/EPA because it fails to insulate the scientists who determine the risks of pesticides and other chemicals from pressure from the government officials who decide how much exposure to these chemicals is acceptable.

Last week, several Assembly Democrats were talking about using Cal/EPA as leverage in dealing with Wilson on the budget and workers’ compensation issue. And a coalition of 15 Republicans and three Democrats introduced a resolution to kill Cal/EPA. Late Tuesday, that effort fell 27 votes short of the 41 needed in the Assembly to block creation of the agency.

Times staff writers Jerry Gillam, Carl Ingram and Paul Jacobs contributed to this article.