NEWS ANALYSIS : County GOP Split Over the T-Word : Crisis: Some business leaders want to keep taxes as an option in addressing Orange County’s fiscal collapse. For others, the very idea is a call to arms.

It is a conflict that would have seemed hard even to imagine: members of Orange County’s conservative business community talking up the idea of raising taxes, while anti-tax citizens suddenly rally to the support of supervisors they once threatened to recall.

In largely Republican Orange County, the tax issue is so sensitive that even the business leaders who two weeks ago urged county supervisors to be open-minded about it are now stressing that they did not actually endorse a tax increase to help solve the county’s unprecedented financial crisis, but merely said it should remain an option--and a last resort at that.

But no matter. The odious T-word was hardly uttered before the county’s anti-tax activists began girding for battle.

And when word leaked that three supervisors were under attack for standing firm against taxes, the fervently anti-tax Committees of Correspondence suddenly became the champion of the very politicians it had considered recalling.

“The county’s taxpayers and their supervisors are under siege by the tax-taker shock troops,” the coalition of community organizers trumpeted last week in an urgent warning. “We hear their drumbeat for taxes in the distance. The Committees must stop them.”

In response, business leaders, including those who recently cracked the door open to a tax hike and those who have fought to keep it closed, were at pains to stress that there really was no philosophical split at all, and no reason for anxiety by the anti-tax activists. At least, not yet.

Every conservative county resident, they said, or at least every leader of the Orange County Republican Party, remains steadfastly opposed to a tax hike.

“A tax increase is just not something that can be done,” said Doy Henley, president of the influential Lincoln Club. With voters already hostile about Orange County’s Dec. 6 bankruptcy, Henley added, “The last thing they’re going to do is vote a tax increase.”

The current tax flap has highlighted cracks that surface only rarely in Orange County’s Republican facade, revealing the different brands of conservatism that exist even in this storied GOP bulwark. In recent years, the tax issue has proven to be a chisel that can split, if briefly, the more pragmatic members of the county’s business community from their more ideological counterparts within the party’s leadership.

For the embattled county supervisors, though, the uproar over taxes could hardly have been better timed, according to several political observers. The three targeted supervisors, all in office during the months leading to the bankruptcy, got to re-emphasize their opposition to taxes, gained support from erstwhile critics and managed to slip--temporarily--out of the spotlight of public anger.

“In the short run, there is certainly some political gain for the supervisors to say they are against new taxes,” said Mark Baldassare, a UC Irvine social ecology professor. “But in the long run, the issue will be what solutions are viable for Orange County and who’s to blame for getting us into this crisis.”

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No business leader has publicly advocated a tax increase. Still, Baldassare said, the current debate does highlight the divergence in the county between “those who are ideologically against all taxes, and those who feel there are circumstances under which tax increases might be justified.”

In urging supervisors to be open-minded about taxes, Baldassare said, some in the business community may view the issue as a potentially quick solution to the fiscal crisis and one that would be least disruptive to the status quo.

Those opposing it, he said, include elected officials and ideological conservatives who see the debacle as a golden opportunity to shrink county government.

Political observers say it is much too early to tell whether this political divide, unlike previous ones, will prove anything more than temporary. But they noted that the supervisors, should they remain adamant against new taxes, may ultimately place themselves at odds with the developers and other business leaders who have historically helped finance their campaigns and who are now signaling openness on the tax issue.

Mark P. Petracca, a UC Irvine political scientist, said he found it “hilarious” that the supervisors are publicly feuding with those he called their “political bosses”--the developers--and are garnering support from Populist taxpayer groups such as the Committees of Correspondence.

Still, Petracca added, “money talks in politics” and long-term political change is doubtful.

The latest controversy over taxes began last month when a thin chorus of voices, including the Orange County Business Council and the local chapter of the League of Women Voters, began urging the county’s leadership to consider all measures that might help fill the county’s gaping budgetary hole. Those options, they stressed, must include possible tax hikes.

The supervisors’ reaction was swift and predictable: They would not consider new taxes.

Then, on Feb. 8, supervisors endorsed a plan to repay the cities, schools systems and special districts that participated in the county’s failed investment pool, the fund whose nearly $1.7-billion losses forced the county into bankruptcy Dec. 6.

The settlement plan was brokered by a trio of influential Orange County business leaders who said it was premature to exclude any option, including taxes, from the “arsenal” of potential solutions to the financial crisis.

Days later, amid reports that three supervisors--Gaddi H. Vasquez, Roger R. Stanton and William G. Steiner--were under pressure from the business community to resign or forgo reelection, largely because of their refusal to consider new taxes, the grass-roots citizens groups galloped to their defense.

Bruce Whitaker, a spokesman for the Committees of Correspondence, a loose-knit coalition of government reformists and anti-tax activists, said members of his organization were outraged to hear that developers were seeking tax increases and trying to influence supervisors.

“To have unelected people do it is very much an affront,” Whitaker said. “I resent it.” The committees, he added, will defend the supervisors “if they are attacked by special interest groups trying to get taxes and subsidies.”

Added Carole Walters, another member of the coalition, which is named after a Revolutionary War organization formed to protest British taxation: “The people are speaking up and are not going to take it anymore. It’s going to be a revolution before you know it.”

But before the activists shout, “Off with their heads,” members of the Orange County Business Council might urge them to wait, and examine more closely what actually has been said.

The business leaders, including developer George Argyros and Pacific Mutual Life Insurance Co. chairman Thomas C. Sutton, stressed last week that they too are opposed to a tax hike and are not promoting it. But the county, they said, needed a shot of reality.

In working out the pool settlement proposal, Argyros, Sutton and Irvine Co. Vice President Gary Hunt examined the county’s obligations to its bondholders and to making the pool investors whole. They looked at possible revenue sources, including the sale of county assets, privatization and downsizing, and searched--hopefully, Sutton said--for any excess county reserves that might have been overlooked.

Their conclusion: If the county wanted to keep its promises to bondholders and give investors their money back, a tax increase might have to be considered.

“I think (it) is frankly irresponsible for anyone to make statements saying that, ‘Yes, you ought to get 100 cents on your dollar’ and ‘Absolutely not, there is not going to be a tax increase,’ ” Sutton said. The two statements, he said, “don’t work together.”

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The architects of the settlement plan, Argyros added, are “very concerned with credibility. We are not going to say something that we don’t believe is true. Based on all the information we have, we know we have to keep (the tax) option open.”

Although neither he nor the others are advocating a tax increase at this point, Argyros said, the business council looked at the idea of raising the current sales tax one-half cent, from 7.75%, for perhaps a 10-year period. County officials have said such an increase could net an estimated $136.5 million annually.

But members of the business council’s Special Task Force on Government Finance did not reach that conclusion unanimously. The task force includes developers Argyros, Hunt, Sutton and Santa Margarita Co. President Anthony Moiso, Carl Karcher Enterprises Chairman William P. Foley, as well as top business executives of The Times Orange County edition and the Orange County Register.

“There was heated debate about whether we ought to even talk about it,” said Wayne Wedin, chairman of the Orange County Chamber of Commerce and Industry. “We had people in the room who are seriously small government people, we had people in the room who are no government people.”

But Wedin and others familiar with the council’s discussions said it was not a mistake to raise the issue.

“We feel the voters have to have some choices because at that point, (after all other options have been considered), it will start affecting our lifestyle. . . . We have to talk about providing education for children and health care,” Wedin said.

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Christine Diemer, who heads the Building Industry Assn. of Orange County, said that it was good to “float this trial balloon,” because the tax issue also had the effect of forcing other unpopular options, including worker pay cuts, layoffs and privatization of services, to the front burner.

“I think it helped everybody realize there are really very few options. . . . They are all going to be tough, hard decisions,” Diemer said.

But Diemer and others said they regretted that the furor over the tax issue distracted from the business council’s central purpose, which was to help forge a settlement between the investors and the county.

Henley of the Lincoln Club agreed.

“While I don’t see (a tax hike) as a viable alternative, unfortunately, of all the good work that the Business Council did in coming up with the plan, that aspect is the only thing that we’ve all focused on,” said Henley, whose club includes many of the county’s wealthiest and most politically powerful Republicans--including some on both sides of the current flap.

Developer Buck Johns, a Lincoln Club board member, scoffed at the notion that voters would approve a tax increase “that would really be going to pay for the ineptitude of county government. That’s just not going to sell.”

Instead, Johns said, the fiscal crisis should be viewed as a “wonderful watershed opportunity” to restructure county government, making it smaller and more efficient in the process. The county, he said, should implement ideas proposed last week by a libertarian public policy foundation, including recommendation to lay off 1,800 county workers, slash pay for the rest by 10 percent, sell assets and privatize services.

The report by the Los Angeles-based Reason Foundation was funded in part by the Lincoln Club and the Howard Jarvis Taxpayers Assn.

“We just shouldn’t miss this chance, but any time you’ve got a tax proposal floating around out there, there’s a lot less pressure to look at any restructuring,” Johns said.

Argyros and other business council members, said that they too favor many such measures but still believe the supervisors may ultimately be forced to face the idea of a tax increase.

“I am not for a tax increase...” Argyros said. “The reality is, if not that, what? Would (critics) prefer we have a giant meltdown . . . not try to help our schools and let the state take over? This is a huge problem. This is not politics as usual.”

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Still, differences over the tax issue are not quite as atypical as they might appear, given the county’s one-party political landscape.

For instance, Baldassare and others said, many prominent developers supported Measure M, the 1990 transportation sales tax, as did the voters. But many more ideological Orange County Republicans opposed it.

And in the summer of 1993, as the county grappled with the tough political issue concerning the future use of the El Toro Marine Corps Air Station, some Lincoln Club board members commissioned a poll to gauge public support for a commercial airport.

But news of their poll drew quick, angry reaction from their own members who opposed a commercial airport. The group’s leaders were forced to state publicly that the Lincoln Club had no official position on the future use of the 4,700-acre Marine base.

The early debate over El Toro--which split North County residents against those in the south closest to the base--showed that the business community could not be considered as a solid bloc in favor of a commercial airport.

“Much of the Republican business leadership in Orange County has always been pragmatic,” said political consultant Harvey Englander. “It could always support elected officials who were ideologues as long as that didn’t interfere with the operation of the county. Maybe it can’t do that any more, but we can’t tell yet.”

The debate over taxes, UCI’s Baldassare said, also served to underline just how elusive public consensus may yet prove on the thorny issues that await the supervisors in the months ahead.

Already, the professor noted, “people who were their supporters become their critics and those who were their critics become supporters. But everyone is going to be a critic until they come up with a plan for how to approach these issues.”

Correspondent Shelby Grad contributed to this report.