Democrats Flesh Out Budget; GOP Blocks It : Funding: Proposal spares education while cutting other programs and raising taxes. Wilson assails the plan and it fails to clear Senate.

Putting the flesh on what had been a bare-bones outline for balancing the budget, Democratic lawmakers Tuesday proposed a plan that would spare education but cut all other spending, raise taxes, take money from local government and stretch out repayment of this year’s deficit over two years.

Gov. Pete Wilson immediately rejected the plan and Republican lawmakers backed him by blocking passage in the Senate--sending the budget deliberations into a stalemate that threatens to force the state to pay its bills with IOUs.

The Democrats’ $41.7-billion general fund proposal would give public schools 5.5% more to spend next fiscal year but cut about 10% from health and welfare, higher education and prison programs. It would reduce the state’s projected $3.8-billion general fund deficit by more than half in 12 months but leave about $1.5 billion still to repay in the fiscal year that begins July 1, 1993.

The plan would raise about $1 billion in direct taxes--taken from either businesses and the wealthy or by suspending indexing of income tax brackets--and would extend for one year a half-cent sales tax increase that is supposed to expire in 1993.

The program also would take nearly $3 billion from local governments over three years and give counties the authority to replace their lost revenue by phasing in local sales tax increases of up to 1 1/4 cents on the dollar. It would shift to the state’s general fund about $700 million from special funds set aside by law for specific purposes, such as the State Water Project, the state Energy Commission and county fairs.

Assembly Ways and Means Committee Chairman John Vasconcellos (D-Santa Clara) said the plan had “fiscal integrity, moral integrity, social integrity and integrity for the future.” He added: “This is a program I can in good conscience vote for and defend with anyone.”

His Senate counterpart, Alfred E. Alquist of San Jose, described it as a “fair proposal” that protected education but otherwise spread the pain evenly throughout the budget.

Although Assembly and Senate Democrats agree that the state should spend about $41.7 billion--more than Wilson’s proposed $40-billion general fund proposal but less than the $44 billion being spent this year--the two houses have different approaches for raising taxes.

The Senate version--rejected on the floor Tuesday--would raise the corporate tax rate from 9.3% to 9.6%, impose a one-time, 10% surcharge on individuals earning more than $500,000 a year, reduce the business meal deduction from 80% to 50% and cap the home mortgage interest deduction at $50,000 a year.

The Senate plan also would increase taxes on multinational corporations and prohibit companies with incomes of more than $10 million from using a tax break intended to help small business.

All of these changes would raise about $1 billion a year. As an alternative, Assembly Democrats proposed suspending the indexing of income tax brackets for two years, which would raise about $600 million annually by forcing taxpayers into higher brackets as they get cost-of-living raises to match inflation.

Vasconcellos said the proposal would require everyone to pay “about a buck a week” and made sense politically because it was simple.

But Wilson, who insists that the deficit be erased in one year and the budget balanced without new taxes, made the income tax proposal the centerpiece of his attack on the Democratic plan. He maintained that the burden would fall heaviest on the low-income working families that Democrats say they represent.

According to Wilson, the suspension of indexing would increase taxes 30% for a family of four making $25,000, from $63 under current law to $82 without indexing. By comparison, the same-size family with an income of $100,000 would pay a $153 increase, or 3% more.

“What this means in practical terms is a tax on every working Californian,” Wilson said.

In highly partisan comments to reporters, Wilson said the Democratic proposal to extend for one year the temporary half-cent sales tax would “kill jobs.” However, a year ago, when the governor proposed the tax and lobbied Republican lawmakers to vote for it, he argued that business paid only about one-third of the sales tax and contended that levy was “the least threatening to the creation of new jobs.”

Wilson also repeated his call for the Legislature to cut $2 billion from the amount he proposed in January for public education. But several Senate Republicans broke ranks and helped pass a separate Democratic proposal to cut just $600 million. The GOP lawmakers said they hoped to persuade Democrats to cut the rest later.

Times staff writer Carl Ingram contributed to this story.