Budget Fight Leads to Face-Off

Tension over California’s unresolved budget came to a boil Tuesday when a top state official confronted another and delivered a public lambasting, saying extremist politicians are bringing state government to the brink of financial disaster.

As a stunned capital press corps looked on, state Finance Director Steve Peace confronted Assembly GOP budget chief John Campbell in a crowded Capitol hallway, accusing him of partisanship that could damage the state for years.

“On a personal level as a citizen I am embarrassed,” a seething Peace said moments after demanding that Campbell and others stop making speeches and start putting up their votes. “The members of the Legislature ought to be embarrassed.... I’ve watched this place deteriorate over 20 years to rank extremism. And that’s why we are in a budget deadlock.”

As negotiations on the Assembly side of the Capitol degenerated to finger-pointing, however, work on getting a budget passed continued in the Senate. Lawmakers said a Senate version of the budget is expected to be voted on early next week and would include an end to a $400-million-a-year tax break aimed at boosting the manufacturing industry. But the Senate may reinstate a tax break for public school teachers.

The confrontation between Peace and Campbell, of Irvine, was set off by a news conference that Assembly Republicans held to denounce the “covert agenda” of a group of Democrats whose private strategy session Monday was picked up by an open microphone and transmitted over the Capitol sound system.

A tape recording of part of the meeting revealed that some of the Democrats were pondering holding up the budget process in hopes of increasing pressure on Republicans to accept new taxes.

“Our colleagues across the aisle do not appear to be negotiating in good faith,” Assembly Republican Leader Dave Cox of Fair Oaks said with more than a dozen GOP colleagues gathered in support.

Some Republicans chafed as reporters asked them about politicizing the budget in their own caucus meetings. One reporter noted that Senate Republican Leader Jim Brulte had threatened at a caucus lunch earlier this year to work to end the political careers of Republicans who vote for new taxes.

“When we talk, we talk about how tax increases hurt people,” said Assemblyman Tony Strickland (R-Moorpark). “They were talking politics first, second and last.”

Peace, who had been listening to the news conference, became enraged when Campbell linked the Democrats on the tape to Gov. Gray Davis, calling them “Davis Democrats.”

Campbell is one of the most prominent Republicans backing a recall of the governor.

As the session broke up, Peace confronted Campbell and defended Davis as one of the few centrist players in budget negotiations, willing to challenge the more liberal members of his party in trying to build consensus for a spending plan.

Shaking his finger at Campbell at several points, Peace admonished the lawmaker for making speeches instead of working on a budget compromise.

Afterward, Peace accused Campbell and other Republicans of engaging in the “same sort of histrionic, comic-book extremism” as the Democrats they caught on tape. He said the state’s financial rating is dangerously close to being downgraded to junk bond status, which would drive up interest rates substantially and possibly block California from being able to borrow enough money to keep the government running.

“If we get downgraded, it won’t matter that a budget is passed the next day,” Peace told reporters. “It is a decade to undo that damage.”

Before he could respond to Peace, Campbell was pulled away by Republican leader Cox.

In the Senate, a budget draft is in the final stages. Senators are expected to approve it sometime early next week, and then send it to the Assembly.

Senate Republicans, though in the minority, are orchestrating the return of the teachers’ tax credit -- a measure that was a key part of Gov. Davis’ budget in 2000.

The income tax credit saves kindergarten through 12th-grade teachers up to $1,500 a year if they have worked in the classroom for 20 years or more.

The credit remained in effect for two years, until last summer when lawmakers suspended it as a way to save money. As part of that action, Davis and the Legislature agreed that the tax break would be reinstated automatically this year.

When the magnitude of this year’s budget gap became apparent, many legislators hoped to ax the teachers’ break once more. But Republicans said cutting it would amount to a tax increase aimed at teachers. At least two-thirds of the Legislature would need to agree to a further suspension. That would require support from Republicans, who have vowed to oppose all tax increases this year.

“We’re not negotiating a budget that includes tax increases,” Brulte (R-Rancho Cucamonga) said Tuesday. “Once you open the door to raising taxes, Democrats say, ‘What about this, what about that?’ ”

To the dismay of business lobbyists, Senate Democrats and Republicans failed to reach a compromise to extend the Manufacturers Investment Credit, a measure that would allow firms to claim a tax credit of 6% on purchases of equipment used in manufacturing.

Brulte said that although he continues to work on ways to save the credit, the measure will expire “as a function of law” unless there is an 11th-hour compromise -- and Democrats say such a deal is improbable.

“The MIC is dead,” Sen. Don Perata (D-Alameda) said, echoing comments by Senate President Pro Tem John Burton (D-San Francisco).

The credit will disappear Jan. 1, effectively adding 6% to the cost of new manufacturing equipment, said Jack Stewart, president of the California Manufacturers and Technology Assn.

“It is an easy short-term gain for [lawmakers], but they prolong the recession,” Stewart said. The credit’s demise would send “a signal that Sacramento just doesn’t give a damn about business.”

Republican Gov. Pete Wilson pushed for the tax break in 1993 as one way to stimulate job growth. Then-Speaker Willie Brown (D-San Francisco) carried the legislation to create it, even though fellow Democrats argued that manufacturers would use the credit to automate factories and hasten layoffs.

To quiet the critics, Wilson and Brown included a provision that the credit would remain in effect only if there were 100,000 more manufacturing jobs in 2001 and each year thereafter than there had been in 1994 -- a low point for the sector.

During the late 1990s and into 2000, manufacturing job growth far exceeded 1994 levels. But more recent employment figures show that there are 1.8 million manufacturing jobs, barely above the 1994 level.

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Times staff writers Gregg Jones and Jeffrey L. Rabin contributed to this report.