NEWS ANALYSIS : Wilson’s Next Budget Fight Likely to Be Over Sales Tax

In crafting his proposed budget for the next fiscal year, Gov. Pete Wilson has taken a giant step toward erasing a sticking point that led to last year’s wrenching and embarrassing budget stalemate--funding for the public schools.

But the governor’s plan contains several trapdoors almost certain to throw it billions of dollars out of balance by May, which could thrust the Republican chief executive and the Legislature’s Democratic majority back into the kind of contentious partisan battle that prompted the 1992 deadlock.

If there is a new standoff, it probably will center on this conflict: Wilson wants the sales tax rate to drop by half a cent in July, but most Democrats want the tax to remain at its current level to avoid deeper cuts in health and welfare programs.

Wilson’s bare-bones $51.2-billion spending plan for the 1993-94 fiscal year represents an overall 11% drop in state expenditures and an 8.5% reduction in the general fund, which supports most of the state’s health, education and welfare programs.

The biggest of these programs is primary and secondary education.

Last year’s budget talks stalled after Wilson insisted on taking back $1 billion that schools had received above the minimum funding required by Proposition 98, the school finance measure voters placed in the Constitution in 1988.

Assembly Democrats refused for 63 days to go along with Wilson’s plan, but finally relented after the governor offered to have the state borrow money and lend it to the schools to keep per-pupil spending from declining. Wilson also agreed to keep education funding at no less than today’s level--about $4,185 per student--for several years.

On Friday, Wilson kept that pledge, proposing another loan and a massive shift in property tax from local government to the schools to help them keep pace with enrollment growth for another year.

School officials and some Democrats criticized the plan, saying the loan would force the schools to mortgage their future if they want to survive today. They also argued that keeping per-pupil spending flat represents a reduction in service because the cost of utilities, maintenance and salaries continues to climb.

But politically, with the rest of government services facing deep cuts, the schools’ lobby probably will have to accept Wilson’s deal, or something very close to it.

“This is as good as it gets for the schools,” said state Sen. Patrick Johnston, a moderate Stockton Democrat. “The schools are dreaming if they think they’re going to get more than that.”

The schools budget is tied to another major piece of Wilson’s plan--his idea of shifting $2.6 billion in property tax revenue from local government to education.

This transfer would return the division of local tax revenue to the way it was before Proposition 13, when schools were getting about 53% of the property tax, and cities, counties and special districts got the rest.

After Proposition 13 reduced property taxes, the state bailed out local governments by shifting much of the schools’ property tax revenue to cities and counties and the special districts, which provide services ranging from fire protection to flood control.

The money the schools lost in the deal was replaced by an infusion of state tax money, which is raised mainly by levies on personal income, sales and corporate profits.

Now that the state is hurting, Wilson wants to reverse the process by shifting property tax from local governments back to the schools, relieving the state of part of its obligation to education.

While sure to raise howls from local government officials, Wilson’s plan is similar to one proposed by Democrats last year, when the Legislature and governor took their first steps down this road. The stiffest resistance probably will come from Republicans in the state Assembly, who see themselves as protectors of city services.

If the schools and local government piece of the budget puzzle can be hammered out quickly and in tandem, that would significantly narrow the scope of the problem facing lawmakers and the governor. Still, what remains would be significant.

The biggest pitfall in Wilson’s plan appears to be his hope that Congress and President-elect Bill Clinton will agree quickly to give California $1.45 billion to cover the costs of services attributed to immigration. Wilson said the state must get that money by May 15 or cut a similar amount from health and welfare services and higher education.

The governor’s budget also envisions $800 million in savings attributed to repeal of the renters’ credit, which gives low-income tenants a $60-per-year break on their state taxes. Not only does Wilson want to take the credit away, he wants to remove it retroactively for the 1992 tax year. There is virtually no chance the Legislature will go along with that.

Finally, Wilson’s budget is balanced with the expectation that the Legislature, by March 1, will enact the welfare reduction plan the governor proposed last year and which lawmakers blocked and voters rejected when they turned down his Proposition 165.

If Wilson, as expected, fails to win approval for the entire reduction, he will be short of his target by as much as $500 million.

Together, these items represent a potential $2.8-billion hole in Wilson’s budget. But the damage would be less if the governor got some of what he is seeking.

Clinton, for instance, is a former governor who has spoken repeatedly about the need for the federal government to live up to its obligations to the states. If the new President rejects Wilson’s call for expanded federal responsibility but agrees to give California the money it is due under current law, the state would get about $575 million.

And although the Legislature seems certain to reject Wilson’s retroactive tax increase for renters, lawmakers might agree to repeal the tenants’ tax credit for future years. That would save about $445 million in 1993-94.

Those two partial victories would leave Wilson about $1.8 billion short of a balanced budget.

That potential deficit, it turns out, is identical to the amount of money the state is scheduled to forfeit when two tax law changes take effect July 1.

On that date, the sales tax is supposed to drop by half a cent, which will cost the state about $1.5 billion next fiscal year. The same day, a tax break that allows businesses to use current losses to offset future income also is scheduled to reappear after a two-year suspension. That one will cost the state about $300 million annually.

Republican Sen. Frank Hill of Whittier, who split with Wilson over the budget last summer but generally supports the governor’s new proposal, said he expects the budget battle to come down to a debate over whether to extend those taxes for another year.

“I’ve felt all along that this budget deal was going to turn on that sales tax extension,” Hill said.

If the debate does pit the sales tax against health and welfare programs, it probably will be easier to settle by compromise than last year’s budget fight, when education took center stage.

Schoolteachers, after all, are a major benefactor of Democratic campaigns and have significant clout in the Capitol, particularly with Assembly Speaker Willie Brown of San Francisco. Brown and his fellow Democrats are sympathetic to health and welfare advocates but do not need them for political survival.

Although Brown last summer was willing, on behalf of education, to go two months into the fiscal year before giving in to Wilson’s demands, that was out of character for the Speaker, who in past years has been the Capitol’s biggest cheerleader for getting a budget done on time and without rancor. If he returns to form this year, the elements are present for a speedy resolution.

“There is an opportunity to move quickly,” said Hill, who sits on the Legislature’s joint budget-writing committee. “I think there’s a real consensus that what we went through last year was an absolute loser.”