NEWS ANALYSIS : THE STATE BUDGET : Tax Cut Plan Is Born of Ideology, Not Abundance

Recession. Deficits. IOUs. Disasters. Military closures. Aerospace layoffs. Orange County bankruptcy. Tax increases. Prison overcrowding. And now, flooding.

The last four years have been filled with so much economic calamity, is it any wonder why some are incredulous that Gov. Pete Wilson could seemingly declare an end to the bad news by offering Californians a sweeping tax cut?

In reality, Wilson’s plan to phase in a 15% income tax cut over the next three years is more than just a chance to reap the benefits of an improving economy. Instead, it reflects a world according to Wilson that has roots in the Ronald Reagan Administration’s philosophy of smaller government and supply-side economics.

Wilson said he believes that lower taxes will produce business growth, jobs for the needy and more state revenues to fund public safety or education.

“When some say, ‘How can we afford to cut taxes?’ the real answer is, ‘How can we afford not to?’ ” Wilson said Tuesday in a briefing for reporters. “What it will do is free up job creators to invest in California. . . . If we do not continue to generate the jobs for a growing California, we are going to find ourselves in a downward spiral.”

So even with an optimistic forecast for the economy over the next five years, Wilson’s latest budget proposal still calls for deep cuts in social programs, higher costs for students and the likelihood of layoffs from the state work force.

In the past, Wilson has justified his call for cutbacks in social programs and higher student fees by saying they were necessary to balance the budget during tough economic times. Now, as the state projects a surplus, the governor said he still plans to cut state programs and pay for a tax cut to keep the state attractive for business growth.

That is not an argument all lawmakers are going to embrace, which raises questions about the chances for Wilson to see his agenda passed into law. The governor did not offer Democrats much they could smile about. And while he asked that they adopt his philosophy for economic growth, the governor also aimed his toughest reforms at traditionally Democratic constituencies--teachers, lawyers and the poor.

Assemblyman Willie Brown (D-San Francisco) warned that Wilson’s proposals amount to a “declaration of war. . . . He attacked education, health and the labor movement, he attacked poor people generally--it was, across-the-board, an attack on everybody who voted differently from the way Pete Wilson would have had them vote.”

The Democratic leader, who is negotiating with Republicans about control of the Assembly, also signaled an ominous start to bipartisan relations in the new Legislature by reminding the governor that he needs 54 votes to pass his state budget and that there are only 40 Republicans in the Assembly.

Political analyst Sherry Bebitch Jeffe, who was in Sacramento to hear the governor’s announcements, said the exchange is either the beginning of a meltdown in relations between the state’s Democrats and Republicans or the opening round of negotiations.

“It may be what you go through when a house is up for sale,” she said. “What Pete Wilson has put on the table is the asking price. Democrats will come back with what is the buying price. And somewhere down the line, they will come up with a mutually agreeable selling price.”

So far, both the Republican and Democratic lawmakers Wilson has asked to adopt his tax cut have been cautious--not ready to embrace a plan that might be economically unwise but also afraid to dismiss an idea that is so politically popular.

The analysis Wilson’s tax cut plan will undergo in the next few weeks will focus on two main areas: the assumptions about economic growth on which the tax cut is based and the cutbacks that will be required in other areas of the state to finance it.

Lt. Gov. Gray Davis said in his official Democratic response to Wilson’s State of the State speech Monday that his party is prepared to pass some form of tax cut.

But Senate President Pro Tem Bill Lockyer (D-Hayward) said Tuesday that Wilson’s tax cut and other proposals could find trouble in the Legislature because they are lopsided in favor of the wealthy.

Before proposing a general tax cut, Lockyer said the governor should correct some of the charges he assessed to lower- and middle-income taxpayers in the past, such as his repeal of the renters tax credit. He also said the budget includes “too little for schools, too much for prisons.”

Lenny Goldberg, executive director of the California Tax Reform Assn., also warned that the governor’s tax cut proposal might be based on a shaky economic forecast. “You cannot base anything on five-year projections,” he said. “My forecast would be that if this (tax cut) passes, the educational needs of the state would suffer.”

Wilson’s tax proposal was based on a report released last month by an economic advisory panel appointed by the governor and headed by President Reagan’s former secretary of state, George P. Shultz.

The report projected that over the next five years the state’s improving economy will generate $37 billion in revenue over the spending levels in 1994.

It recommended that about half the amount go to classrooms between kindergarten and 12th grade to keep pace with the requirements of Proposition 98. About a quarter of the additional revenue would pay for the tax cut. And the remainder would be left for everything else--mainly debts, higher education, public safety, health and welfare.

Tuesday, when he presented the budget, Wilson adopted a more conservative economic forecast than his advisory panel submitted, scaling back the $37-billion estimate to $28 billion over five years.

The result left $7.6 billion to pay for the tax cut, $11.9 billion of increases to education over the next five years and about $8.5 billion for everything else.

That $8.5 billion is not enough to maintain the current level of service for higher education, welfare and public safety. As a result, sharp cuts are needed to help pay for the tax cut.

Even with the tax cut, Wilson officials said that California’s tax rate will be among the highest for western states. They added that the increase in student fees will still leave California with the lowest cost in the nation for a comparable college education.