Budget Deal Falls Apart in Tax Cut Fight

California’s $100-billion budget deal unraveled early Friday, hung up on tax cuts.

Republicans in the state Assembly refused to approve the spending plan, which had already passed the Senate, fearing that Gov. Gray Davis’ $2.7-billion tax cut package would erase cuts in the “car tax” authorized two years ago.

“It’s fundamentally unfair to tell Californians they’re getting a tax cut, when they’re paying for it by giving up another tax cut,” said Assemblyman Jim Battin (R-La Quinta). “It’s like a shell game.”

Deals forged behind the scenes to make passage seem sealed on Thursday could fall back into place quickly Monday, when lawmakers return to Sacramento, or could degenerate, with negotiations dragging on for days.

“Everything is off the table,” Assembly Speaker Bob Hertzberg (D-Sherman Oaks) said Friday, vowing to start constructing the budget anew on Monday.

Hertzberg, frustrated and weary, brought the session to a close at 3:30 a.m. Friday, after Republicans, fretting about future tax cuts, refused to provide enough votes to approve the massive budget.

“We made a lot of decisions to accommodate the Republicans,” Hertzberg said. “It’s disappointing when you work this hard in this cooperative of a manner, and they keep coming up with new stuff.”

The surprising twist came after the Senate approved the spending plan easily Thursday morning, and after Davis held a brief afternoon news conference lauding the Legislature and predicting that lawmakers would send him the budget by day’s end. That would have given him plenty of time to sign it by the July 1 start of the new fiscal year.

“The administration assumes the Assembly is going to work this through,” Phil Trounstine, Davis’ communications director, said Friday. “The administration still expects to sign a budget on time.”

The Assembly stalled with 48 votes, six short of the two-thirds majority needed in the 80-seat house. The reason: a 1998 law engineered by then-Gov. Pete Wilson to slash the “car tax,” the fee that Californians pay to register their vehicles each year.

The car tax is now 35% of what it was in 1998, saving motorists $1.7 billion annually. It is supposed to fall further in coming years. Once the Wilson cut is fully implemented, motorists will be saving $3.3 billion annually.

But the 1998 law contains complex caveats. One says that car tax cuts must be reduced if lawmakers grant other tax cuts that exceed $100 million in a year.

Next year, motorists stand to save $1.7 billion. However, Davis’ tax cut package, a combination of one-time rebates and ongoing tax breaks, would reduce various taxes permanently by $845 million. That $845 million would be subtracted from the car tax savings.

Instead of saving $1.7 billion on car taxes, motorists would save $855 million. The problem could be solved by passage of simple wording ensuring that the car tax cut would remain intact.

But unless the law is altered, motorists could find themselves paying more to register their cars next year than they did this year.

Republicans raised the issue in the Senate as early as last December, warning that license fee reductions would have to be protected before any other tax cuts occurred. At least one bill has been introduced to deal with the issue.

The car tax problem was also discussed during budget deliberations earlier this month and last month. And it was the subject of negotiations throughout Thursday. Hertzberg promised Republicans that the car tax cut would be protected.

But late Thursday, after the Senate had adjourned for the weekend and Senate President Pro Tem John Burton had left the Capitol, Assembly Republicans concluded that Hertzberg’s promises would not suffice. Without Burton’s blessing, the Senate could reject any deal struck in the Assembly.

One top Republican blamed Senate Democrats for “monkeying around” with the legislation that would have fixed the problem. Democrats, some of whom opposed the car tax cut, shrugged it off.

“If you made a bad decision back in 1998--and you did--we’re sorry,” Assemblywoman Sheila Kuehl (D-Santa Monica) told Republicans during the budget debate.

Burton, the Legislature’s most influential member, is a key to any solution. He opposed the 1998 car tax cut and is not enamored of Davis’ tax cut package. The upper house would have to approve any change in the 1998 car tax law.

Burton said in an interview Friday that he would support legislation ensuring that vehicle license fees would not rise in future years. But he is hesitant to eliminate the provision that he says protects the state against cuts that are too hefty.

“You’ve got to run government,” Burton said, “and you cannot have it on autopilot” with expanding tax cuts.

Burton said the provision that limits car tax reductions if lawmakers approve other tax cuts “was part of the [1998] agreement, or else there wouldn’t have been a vehicle license fee cut.”

“It’s [the Assembly’s] problem,” said Burton (D-San Francisco). “We passed the budget 31 to 9. If the Republicans want to hold this up, be my guest.”

Adding to the situation, Republicans are unhappy about Davis’ tax cuts, saying they are too small and aimed too much at the wealthy.

In particular, they’re critical of Davis’ proposal to shave .55% off the state income tax rate. That step would save Californians $300 million a year. But people earning more than $100,000 would get by far the largest share--$165 million of that sum. A married couple with one child and earning $60,000 a year would save about $11 a year, according to one analysis.

Assemblyman George Runner (R-Lancaster), a budget committee member, said there is growing opposition to the .55% tax rate cut.