Wilson’s Service Cuts Challenged : Budget: Group proposes an alternative spending plan with $4 billion in new taxes. One lawmaker says planned trims carry ‘indefensible’ consequences.

A major tenet of the Capitol’s conventional political wisdom--that there can be no tax increase in an election year--came under attack Wednesday as a group of outsiders and a leading Democrat challenged Gov. Pete Wilson’s position that the state’s $11-billion budget gap must be closed with service cuts alone.

An embryonic movement with its roots in liberal Santa Cruz County issued what its members called an “alternative budget” containing nearly $4 billion in new taxes, mostly on business and the wealthy.

Senate Democratic floor leader Barry Keene of Benicia, meanwhile, emerged from a meeting with the Republican governor and other lawmakers to declare that Wilson’s no-tax position carries consequences for schools, health programs and social services that soon will be seen as “indefensible.”

Keene said Senate Democrats intend next week to publish a detailed description of what would happen to those programs if Wilson prevails.

“We call it ‘Operation Gory Detail,’ ” Keene said. “We launch that next.”

The separate developments represented the most vocal opposition so far to Wilson’s contention that the state cannot raise taxes again in hopes of digging its way out of a fiscal hole that seems to grow deeper each month.

Because it takes the governor and Republicans in the Legislature to enact a new budget, most leading Democrats until now have concluded that there would be no new taxes this year on the heels of a $7.5-billion tax increase that Wilson, most Democrats and a handful of Republicans supported a year ago.

But that consensus was challenged Wednesday by a group that said the Capitol’s insiders--in both parties--have lost sight of what the cuts Wilson envisions would mean for the state’s health and social programs.

So far, Wilson has proposed reducing welfare grants by up to 25% and eliminating dental care and long-term hospitalization for poor adults. In addition, he has said it would take a cut of more than $2 billion in public school budgets--about $500 per student--and the equivalent of a 15% reduction in most other state programs, including universities and prisons, to balance the budget.

Cuts of that magnitude are not acceptable, said Santa Cruz County Supervisor Gary Patton, who led the coalition, which also included advocates for the poor and an association of nonprofit community groups that contract with local governments to deliver health and social services.

As an alternative, the group proposed more frequently reassessing business property, applying a severance tax to oil as it is pumped from the ground, and increasing taxes on multinational corporations.

The group also advocated taxing inheritances that exceed $5 million, limiting the deduction of business meal expenses to 50% of the restaurant tab and raising the income tax rate for individuals earning more than $100,000 a year.

Other items on the list: limit to $70,000 the amount of mortgage interest that taxpayers can deduct; tax lottery winnings, and eliminate sales tax exemptions for printed advertising material and fuel used in private airplanes.

Many of the proposals would re-establish taxes the Legislature has repealed over the years. Others are included in an initiative measure that may appear on the November ballot.

Patton said Wilson and legislators mistakenly believe that voters would prefer deep cuts in schools and health and welfare programs over the kind of tax hikes the coalition is proposing. Patton said the state’s leaders are “in denial” over the potential impact of the course they’ve chosen.

“Throughout the state, the people are not in denial,” Patton said. “They’re ready for this. This isn’t a general tax increase. This doesn’t hit middle income people and small busineses. This closes the loopholes for the privileged.”

Robert M. Kardon, executive director of the California Assn. of Nonprofits, said a “brush fire movement” is building among middle-class voters who see Wilson and legislative leaders deadlocked and “do not believe this state is being governed.”

But a spokesman for the governor said Wilson has no intention of wavering from his pledge to balance the budget on cuts alone.

“This thing should be resolved without a tax increase,” said James Lee, Wilson’s assistant press secretary.

And Republican Assemblyman Tom McClintock of Thousand Oaks, the Legislature’s most vocal critic of higher taxes, said another tax hike in the middle of the recession is the last thing the economy needs.

“These guys still haven’t gotten the message that the economy cannot pay for this level of state expenditures,” McClintock said.