State analyst offers own formula on budget gap

California’s budget shortfall has swollen from $14.5 billion to $16 billion, according to the Legislature’s chief fiscal analyst, who said the governor’s proposal for closing the deficit is so inadequate that her office took the rare step of drafting an alternate plan for lawmakers to consider.

The proposal by Legislative Analyst Elizabeth G. Hill, to whom lawmakers of both parties look for advice on fiscal matters, called on lawmakers to raise taxes by at least $2.7 billion. It urged them to reject Gov. Arnold Schwarzenegger’s plans for a 10% across-the-board reduction in spending, saying his approach is short-sighted.

In a report issued Wednesday, Hill identified a dozen tax breaks she said were ripe for modification or elimination. They include tax credits that individuals can claim for dependent children and seniors, and that companies can claim for research and development as well as for hiring low-income workers.

She also suggested eliminating a loophole that allows yacht buyers to avoid sales tax by keeping their newly purchased boats out of California for 90 days. Democrats call it the “sloophole.”

Hill took issue with some of the governor’s ideas for saving money. His bid to close 48 state parks can be avoided by increasing fees, she said. And he should scale back his plan to save $471 million with welfare cuts, she said, because too many needy children would be cut off from aid.

Democrats embraced Hill’s ideas. But the governor and GOP lawmakers said they would continue to block any tax increases.

“While I believe that we should begin negotiations with all ideas on the table,” Schwarzenegger said in a statement, “I have been very clear in my position against raising taxes to fix Sacramento’s spending problem and our budget.”

Hill attributed the increase in the deficit largely to the depressed housing market and high energy prices. It erased most of the effect of emergency spending cuts lawmakers have made so far to bring the budget into balance.

Those actions, approved by the Legislature and governor late last week, amounted to roughly $2 billion in service cuts, largely in school programs and healthcare for the poor.

Lawmakers made an additional dent in the deficit through borrowing, deferrals and other maneuvers that will ultimately require repayment. All of these actions taken together will reduce the deficit by $8 billion but add to the state’s long-term fiscal troubles.

Schwarzenegger has called on lawmakers to begin immediately making more cuts, saying that any savings attained in the current fiscal year will make it easier to propose a balanced 2008-2009 budget by the state’s July 1 deadline.

But Democrats who control the Legislature said tax hikes must be on the table for budget talks to move forward.

Assembly Speaker Fabian Nunez (D-Los Angeles) said the report “makes it clear that a slash-and-harm, cuts-only approach of dismantling state government won’t fix our budget problems.”

Although he applauded Hill’s report, Nunez said his caucus would like to see tax increases beyond the $2.7 billion proposed by Hill. He said one possibility is scaling back or eliminating the tax break on mortgage interest that can be claimed on vacation homes valued at more than $1 million. The speaker also said he wants to increase taxes on oil companies.

The tax hikes Hill suggested would affect millions of Californians. Nearly half the $2.7 billion in new revenue in her plan would come from reducing a $294 state credit that taxpayers can claim for each dependent to $94.

Businesses also would take a hit.

New limits would be put on a state research and development credit for biotechnology, electronics, space exploration and other research-oriented industries that tend to provide high paying jobs, saving the state $335 million.

An additional $100 million would be saved by phasing out certain tax credits given to companies that locate in blighted areas.

Hill said it was unclear whether the tax breaks mentioned in her report were serving their intended purpose. The research credits are going to companies that would probably locate in California even without such incentives, for example. And nearly a third of the money the state spends on the dependent tax credit goes to families earning more than $100,000.

She said the tax breaks “deserve the same type of examination that we are suggesting occur on the spending side of the budget.”

GOP lawmakers waved off that idea. “Californians already pay enough taxes,” said Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks).

Hill’s report, meanwhile, took issue with a number of the governor’s proposed spending cuts beyond the parks and aid to needy children.

It said the governor’s proposal to cut by 10% the rates paid to doctors who provide subsidized care to the poor -- approved by lawmakers last week -- should be rejected. She warned that such a reduction would exacerbate the shortage of doctors willing to treat the poor, forcing patients to seek care in emergency rooms, which ultimately costs the state more.

Schools would still be hit hard under the analyst’s plan, but not as hard as they would by Schwarzenegger’s.

Hill suggested lawmakers cut next year’s budget for schools and community colleges by roughly $1 billion less than the $4 billion the governor wants to cut.

And Hill called on lawmakers to reject the governor’s plan to provide correctional officers with a 5% pay hike, a move that would save $500 million.

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evan.halper@latimes.com