NEWS ANALYSIS : 'T-Word' Tumult in Orange County : Business council's suggestion of possibly raising levies reveals split among conservatives. Anti-tax activists defend supervisors they once sought to recall.

TIMES STAFF WRITERS

It is a conflict that would have seemed hard to imagine: members of Orange County's conservative business community talking up the idea of raising taxes, while anti-tax citizens 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 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 among 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 tax flap has highlighted cracks that surface only rarely in Orange County's storied Republican facade, revealing the different brands of conservatism that exist even in this legendary GOP bulwark. In recent years, the tax issue has proved 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. When the three targeted supervisors, all in office during the months leading to the bankruptcy, got to re-emphasize their opposition to taxes, they gained support from erstwhile critics and they 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."

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

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 named after a Revolutionary War organization, said members of his group 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 group, he added, will defend the supervisors "if they are attacked by special interest groups trying to get taxes and subsidies."

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

The business leaders, including developer George Argyros and Pacific Mutual Life Insurance Co. Chairman Thomas C. Sutton, stressed 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 they 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 all of 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."

But even internally, members of the business council's Special Task Force on Government Finance did not reach that conclusion unanimously.

"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."

Developer Buck Johns, who is opposed to a tax increase, 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. Argyros and other business council members said they, too, favor many such measures but still believe the supervisors may 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."

Correspondent Shelby Grad contributed to this story.

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