Davis Seeks $8.3-Billion Tax Hike

Times Staff Writers

Gov. Gray Davis will propose raising taxes today by $8.3 billion a year to balance the state budget, increasing the income tax rate on the wealthiest Californians and boosting the sales tax by 1 cent, administration officials familiar with the budget said Thursday.

The taxes would be used to pay for child welfare assistance, home care for the disabled, substance abuse programs and other state services that the governor will ask the Legislature to shift to local governments, the officials said.

In addition to the increased sales and income taxes, Davis is seeking to add $1.10 in taxes on each pack of cigarettes and raise assorted fees. Unlike last year, the governor won't propose raising vehicle license fees or taxes on alcohol -- recommendations that were ultimately rejected by the Legislature.

Davis is also poised to propose billions of dollars in spending cuts today when he presents his budget to the Legislature. He must offer a balanced budget, which will require bridging what Davis describes as a $34.8-billion gap over the next 18 months.

The Democratic governor faces a tough political fight to win approval for any of the new taxes he is proposing. He needs the votes of at least two Republicans in the state Senate and six in the Assembly to achieve the two-thirds majority required to pass his budget -- and Republicans say they won't support any sort of tax increase.

"I have no intention of voting to raise the sales tax," said Republican Senate Leader Jim Brulte of Rancho Cucamonga. "We believe that we need a spending cap and a spending freeze because this deficit was created by runaway spending."

The governor's proposed tax increases would account for 23% of the amount needed to bridge the projected budget shortfall, officials said. The sales tax increase alone would generate an estimated $4.6 billion annually, while raising the income tax rate on California's wealthiest citizens would generate an additional $2.6 billion and the cigarette tax will bring in $1.2 billion more, the officials said.

The governor's proposal reinstates two top rates in the California income tax. Individuals would pay 10% on any income in excess of $136,115, and couples on income above $272,230. The 11% bracket would kick in for individuals earning in excess of $272,232, and for couples with annual income of $544,464 or more. Currently, the state's top income tax rate is 9.3%.

Davis may be attempting to blunt Republican criticism of the tax increases by designating the money for state services that would be shifted to local control.

But the realignment of government services -- a tactic also used by Republican Gov. Pete Wilson to address a $14-billion shortfall in the early 1990s -- meets another goal for Davis: easing the budget impact of economic downturns, administration officials said.

"People are not opposed to paying higher taxes for vital services," said an administration official involved in the budget discussions.

"If these programs don't get realigned, they get cut."

In his annual State of the State speech Wednesday, Davis said he won't sign the budget unless the Legislature approves significant changes in the tax structure and budget process that funds state government.

Among the recommended budget cuts Davis is expected to unveil today are a $1.5-billion reduction in payments to medical providers in the $26.8-billion Medi-Cal health program for lower-income Californians, people familiar with the governor's budget said. This will include a new 5% cut in fees for doctors, pharmacists and other medical providers who treat enrollees in Medi-Cal, on top of a 10% cut proposed last month, these people said.

Only hospitals and certain rural health centers would be exempt from the cut.

Davis faces resistance from Democrats in his proposals to make deep cuts in social programs.

The governor may also have to overcome local government opposition to his plan to shift responsibility for major state programs to counties.

In 1991, the Legislature approved Wilson's proposal to shift primary responsibility for mental health care to counties and provided $2 billion in sales tax revenue to pay for it.

That since has grown to $3.2 billion, but the state payments will fall as much as $150 million short of the cost of caring for the mentally ill this year, said Pat Leary, director of the California State Assn. of Counties.

Davis will propose today shifting remaining mental health programs and substance abuse programs to counties -- programs that cost the state slightly more than $300 million.

In addition to Medi-Cal, the state also will cede to counties responsibility for home health-care workers who help disabled people remain in their homes, which is a $1.4-billion expense, and for nursing home care, another $1.4 billion.

Additionally, the state would shift responsibility for child welfare services to counties. These range from adoption services to a $1-billion child-care program for people on welfare.

In proposing a sales tax increase and increase in the income tax on high earners, Davis is also following proposals Wilson offered in 1991.

By giving the money directly to local government, the state can avoid the requirement that roughly 50 cents on every dollar of new taxes must go to public schools.

Sales taxes are California's second-largest source of revenue behind the personal income tax, generating $21.1 billion for state coffers last year. Combined state and local rates range from a low of 7.25% in counties such as Ventura, to a high of 8.5% in San Francisco. Los Angeles' current rate is 8.25%.

It's unclear whether Davis will win support in the Legislature for the income tax hike, even from all Democrats. His incoming finance director, Democratic former state Sen. Steve Peace, has expressed skepticism about raising the income tax on high earners, noting that their income is notoriously volatile. To pass, at least some Republicans would have to support it.

"It is popular with voters," said Senate Budget Committee Chairman Wesley Chesbro (D-Arcata), "but we'll have a hard time getting the votes to pass it."

As it is, only one Republican in the Legislature voted for the current budget, which included no general tax hikes. That lawmaker already has said he won't support an income tax hike.

"I won't vote for a higher income tax on high earners," said Assemblyman Keith Richman (R-Northridge). "It will just make the problem worse."'

Republicans continued their criticism of Davis on Thursday when they unveiled a proposed constitutional amendment to cap spending, calling it a cornerstone of their plan to reform California's budget process.

The cap would prohibit state spending from growing faster than population and inflation. Any extra money in state coffers when the economy is good would go into a rainy day fund. Once that rainy day fund reaches a certain level, excess revenue would go to education funding and rebates for taxpayers.

A spokeswoman for Assembly Speaker Herb Wesson (D-Culver City) dismissed the proposal as "nonsense from the Republicans."

And advocates for public schools and the poor said the proposal would do nothing to solve the current budget crisis while restricting future spending to levels that jeopardize essential services.

"It would lock us in for everything, providing no mechanism to rebuild schools, infrastructure and a social safety net when times are good," said Jean Ross of the California Budget Project, which researches how budget policy affects low-income Californians.

But Assemblyman John Campbell (R-Irvine) touted the proposal as the best way to break free of California's boom-and-bust budget cycle.

"This keeps spending from growing faster than the economy's ability to pay for it," he said.


Times staff writers Evan Halper, Charles Ornstein and Marla Dickerson contributed to this report.

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