Davis Seeks Tax Hikes to Bridge Gap

Gov. Gray Davis proposed raising taxes Tuesday on smokers and motorists to help overcome what has grown into a $23.6-billion budget shortfall, saying there was no other way to protect schools.

The move reversed a promise Davis made in January not to ask for tax increases.

The tax hikes--an $84 increase in the average vehicle license fee and a boost of 50 cents per pack in the cigarette tax--would total $1.75 billion, according to Davis’ estimates. But although they probably will account for most of the Capitol’s budget debate in coming weeks, they represent only a share of Davis’ plan to fill the budget shortfall.

Much of the gap would be closed by $7.6 billion in spending reductions, including deep cuts in health programs for the poor. Davis also relies heavily on various accounting shifts, budget transfers and loans, such as borrowing $4.5 billion against the state’s future share of the national tobacco settlement and postponing some payments to schools.

His fourth budget as governor surely isn’t the one Davis hoped to propose as he seeks reelection. It represents a dramatic reversal of fortunes in just two years. In May 2000, Davis presented a budget that featured an unanticipated surplus of $12.3 billion and offered tax rebates along with new spending on education and transportation.

The combination of cuts and new taxes outlined Tuesday would allow the state to protect spending on public education, meeting the voter-mandated guarantee of $47.2 billion for schools in the fiscal year that begins July 1, Davis said.

The governor defended his call for higher taxes, saying the size of the budget gap left him no choice.

“Twenty-four billion dollars crosses the line,” he said. “I had to find other ways to close this gap. I’m not going to sacrifice the future of our children, particularly in public education. Without some revenue increases, I would have had to do that.”

But the governor’s plan puts Davis and fellow Democrats on course for a prolonged budget battle with Republican lawmakers.

The budget needs a two-thirds vote in both the Senate and Assembly to pass, so Democrats need at least four Republican votes in the Assembly and one in the Senate.

Senate Republican leader Jim Brulte of Rancho Cucamonga said he knew of no lawmaker in his party who would support the tax increases.

Timing of Hikes Is Questioned

In an apparent reference to the proposed increase in the vehicle license fee, which would not take effect until Jan. 1, Brulte said that if Davis really wants a tax increase, “he ought to have the political courage to propose that it take effect before the Nov. 5 election rather than after the election.”

Republicans blame the state’s fiscal woes on Davis’ spending habits. By Davis’ own account, general fund spending has grown by 32% during his first term in office. That represents lower growth than during all but two of the 10 previous gubernatorial terms.

Davis cited an economic downturn compounded by the terrorist attacks of Sept. 11 and the state’s tax structure as reasons for California’s fiscal headaches. He said the top 5% of taxpayers account for 70% of state revenues.

That structure lifted the state’s budget during the dot-com boom and coinciding bull market.

The state is now feeling the flip side, however, since the burst of the Silicon Valley tech bubble and a downturn in the stock market, which has left wealthy Californians unable to take advantage of stock options or capital gains.

Revenues from the stock options and capital gains are expected to plummet from a peak of $17.6 billion in 2000 to $8.2 billion in 2001 and $7.2 billion this year.

The $23.6-billion shortfall estimate represents nearly a doubling of the state’s budget woes since January, when California faced what was thought to be a $12.5-billion problem.

At that time, Davis called for $5.2 billion in budget cuts. The revised budget adds an additional $2.4 billion in cuts as well as the tax increases. New trims target libraries, mental health and juvenile justice programs.

Davis also proposed borrowing $4.5 billion against the state’s tobacco settlement, nearly twice as much as the $2.4-billion sum he floated in January.

Senate Leader John Burton, the San Francisco Democrat, said he doubted members of his caucus would go along with cuts in crime prevention programs for juveniles.

“We’re going to have to find the revenues and make it work,” said Burton, who wants to raise taxes on high-income Californians. “Now that the issue of taxes is on the table ... it’s like being a little bit pregnant. They are on the table and the need has been acknowledged.”

Criticism Comes

From Tax Targets

The revised budget released Tuesday was quickly criticized by some of those who would be taxed, as well as some who would see their programs cut.

Philip Morris spokesman Tom Ryan criticized the cigarette tax, saying California smokers already pay some of the highest levies in the nation.

“It’s fundamentally unfair to single out smokers to balance the state budget,” Ryan said. “The taxes on cigarettes are already the highest of any consumer product. It’s bad public policy. This is a tax directed at roughly 20% of the population. A good tax, a fair tax, is evenly spread out throughout the population.”

Advocates for the poor complained that the most vulnerable members of society appeared to be taking the biggest hit.

Jim Keddy of the Pacific Institute for Community Organization, a coalition of faith-based groups that has lobbied to expand health coverage for the uninsured, said the cuts will have a damaging effect on California’s social safety net.

“It’s worse than I expected,” Keddy said. “The bottom line is that poor people in California are going to have a harder time getting health care.”

“The indirect impact of scaling back [social services] administration is that people will be facing longer lines,” added Jean Ross, executive director of the California Budget Projects, a group that advocates for the poor during the budget process.

Despite their problems with some of Davis’ proposed cuts, Ross, Keddy and Democratic lawmakers rallied around the governor, whom they praised for being willing to talk taxes.

“In an election year, for him to make these very tough recommendations on the cuts side but also the revenue side, [is] a testament to his responsibility and strength,” said Assemblywoman Jenny Oropeza, the Long Beach Democrat who chairs the Assembly Budget Committee.

Trauma Care Is

a Prime Concern

Oropeza said her caucus remains concerned about funding for trauma care and that a health insurance program for children be expanded to include their parents.

The new Davis spending plan assumes that the state will float bonds to repay the general fund for the more than $6 billion spent on electricity during last year’s energy crisis. It also assumes that a plan to borrow about $7.5 billion to avert a cash crunch this summer passes muster with Wall Street.

The governor’s revised budget relies on about $1 billion in increased funding from the federal government for health, security and other expenses. It counts on another $1 billion being freed up by refinancing the state’s debt. It also defers for two years a program that allows businesses that lost money in one year to avoid paying income taxes on certain future earnings.

The change is expected to save the state $1.2 billion in the near term but cause additional pressure on state finances in future years. Another $3.5 billion is found through loans and by shifting and transferring funds.

Local government officials said they were relieved that Davis had not resorted to shifting large sums from cities and counties to fill the state’s budget gap, as Gov. Pete Wilson did a decade earlier to maintain education spending. Many local government advocates were worried that Davis would stop payments to cities and counties that are intended to make up for money the locals lost when vehicle license fees were cut a few years ago. But they were troubled by an array of program cuts that passed costs down to them, including more than $30 million in subsidies meant to help save farmland from development, and an array of health and mental health reductions.

State officials estimated the cuts and funding deferrals would result in $1 billion less for counties.

“Over a billion seems to be a large amount,” said Steve Szalay, executive director of the California State Assn. of Counties. “We are especially concerned about cuts that shift costs to us, because that hits us hard. Is it intended to be a cost shift to counties, where counties make it up, or a loss of services to poor people? Both are a problem to us. The counties can’t afford to take on those costs.”

By choosing to apply his paring knife to social services and other programs, Davis once again staked out education as a top priority.

The governor proposed roughly $1.7 billion in funding shifts between the current fiscal year and the upcoming one to avoid suspending Proposition 98, the 1988 ballot measure that dedicates about 35% of the state general fund for public schools.

Payments due to schools in the current fiscal year for programs such as summer school would be delayed until after the start of the new fiscal year.

“To us, this is an ingenious way to protect education funding between the two years and [help] solve the overall problem that the state faces,” said Barbara Dean, president of the California Assn. of School Business Officials.

Added Wayne Johnson, president of the California Teachers Assn.: “Given the gravity of the budget deficit, this is a good budget.”

But Assemblyman John Campbell, the Irvine Republican who handles budget matters for his caucus, described the funding shifts as “an accounting trick.”

California’s college and university systems also were largely spared from serious cuts. Officials said the comparatively ample funding would rule out student fee increases for the coming school year, except for previously planned hikes for non-California-resident students attending schools in the University of California and California State University systems.

College administrators said the budget trims also avoided cutbacks in instructional programs.

The 22-campus Cal State system was targeted for a proposed $50.4 million in cuts from its proposed $2.76-billion budget. Cal State officials said the cuts mainly would affect such areas as maintenance and library purchases.

At a meeting of the CSU’s Board of Trustees in Long Beach, Richard West, the system’s chief financial officer, termed the cuts “manageable.”

“Higher education, and education in general, has been pretty well protected,” West said.

Times staff writers Carl Ingram and Stuart Silverstein contributed to this report.