Gov.'s staff exploring new taxes

Times Staff Writer

As Gov. Arnold Schwarzenegger continues to say publicly that he will hold the line against new taxes, his administration is laying the groundwork for a possible tax increase.

Administration officials are soliciting advice from business groups and other special interests on how to propose billions of dollars in tax hikes that could help close a budget shortfall the governor now says is as large as $20 billion.

Schwarzenegger's staff is exploring a range of options, including sales taxes on lawyer and accountant services, on high-end services such as golf lessons and personal-trainer sessions, and on takeout coffee and other prepared foods that are not taxed now.

The administration's goal, participants in the discussions say, is to gather support for new taxes from a broad spectrum of the business lobby, giving the Legislature's Republicans political cover to break their pledges never to vote for them.

Several lobbyists and state officials involved in the meetings agreed to talk about them on condition of anonymity, for fear of antagonizing the administration. They say talks have heated up as the governor prepares his revised budget plan for release May 14.

That plan will reveal how large the deficit has grown in recent months -- a number that state accountants are still calculating as they sort through April tax receipts. Schwarzenegger's staff is advising the interest groups that the governor is prepared to call for a tax increase if California's finances have darkened considerably.

Administration press secretary Aaron McLear would not comment on what had been discussed in the meetings.

"The governor does not support raising taxes," McLear said. "I can't comment on private meetings and who we have talked to internally."

McLear said: "Everybody knows the deficit will be bigger than it was in January. . . . We're preparing for every different scenario."

At the meetings, according to those who have attended, administration officials are asking interest groups which taxes might be acceptable -- and what the administration should demand in return from the Democrats who control the Legislature.

The administration is studying several ways to tax services: narrowly, on luxuries such as personal trainer services and golf lessons, or more broadly.

A broader levy that might affect all entertainment purchases -- including movie, theater and sporting event tickets, amusement park admissions, ski lift passes and greens fees -- could raise about $1 billion, according to state tax officials. Taxing the services of lawyers, accountants, mechanics, landscapers, hairstylists and every other service professional in the state could generate more than $8 billion, they say.

Other possibilities the administration is studying are a tax on certain prepared foods, such as a cup of coffee to go, and on Internet software purchases. Also on the table are limits on the deductions that businesses can claim on losses.

Before the governor raises taxes, should he go that route, he is expected to demand legislative support for spending restraints that would force the state to create a rainy-day fund with revenue windfalls it receives during good economic times. Business leaders have long pushed for such measures, arguing that they would curb runaway spending and bring some stability to state finances.

Business leaders are also lobbying the administration to use potential tax hikes as leverage for policy changes unrelated to state spending, such as changing workplace rules to allow employers to dictate when workers can take breaks. Political analysts were not surprised to learn that the governor was considering tax hikes.

"He used to say we can have a gold standard of public service without paying more if we just wring the waste out of government," said Bruce Cain, a political science professor at UC Berkeley. "I think he now understands that is a myth."

The budget blueprint the governor presented in January gave a glimpse of how state programs would be affected without new revenues. He proposed school cuts that would result in thousands of teacher layoffs, closing dozens of state parks and substantial cuts in healthcare programs for the poor.

Since that time, tax receipts have plunged by billions more, meaning that the cuts would have to be deeper if the governor and lawmakers did not find new revenue.

The governor continues to say that lawmakers may be able to find alternatives to new taxes, such as leasing the state lottery to a private firm.

The lottery "could bring us in billions and billions of dollars," Schwarzenegger said in a KPCC-FM (89.3) radio interview with Times columnist Patt Morrison, to be broadcast today. "There's areas like that. We just have to get, you know, creative about it."

Many fiscal analysts are skeptical. They say that squeezing multiple billions out of the lottery would require voters to sign off on changes to the state Constitution, something that could not occur until November. By then, the state could be in a cash crisis. And privatization of the lottery is opposed by gambling interests rich enough to fight it with a well-financed campaign.

The governor's anti-tax rhetoric, meanwhile, has softened considerably. He is saying publicly that he is open to looking at eliminating existing tax breaks, or "loopholes," that don't significantly boost the economy.

He says the state cannot balance the budget on cuts alone because the effect on services would be too severe. And he is warning that the deficit is growing so big that every option for balancing the budget must be considered.

Schwarzenegger's declaration that the deficit may be growing to insurmountable heights -- the $20-billion figure he threw out earlier this week seemed inflated to even the most pessimistic forecasters -- signaled to many in Sacramento that he was girding to endorse taxes. The rhetoric of his business allies is also starting to shift.

Loren Kaye, president of the California Foundation for Commerce and Education, a think tank affiliated with the California Chamber of Commerce, wrote recently in the Sacramento Bee that a temporary tax hike may be appropriate -- if the Legislature supports spending restraints that would keep the state from ever again spending more than it brings in.

Bill Hauck, president of the California Business Roundtable, said his group was also looking for a long-term solution.

"The magnitude of the problem is going to dictate the solution," he said. "I think my members' overall view is the state of California has got to get its fiscal house in order."

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evan.halper@latimes.com

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(BEGIN TEXT OF INFOBOX)

Governor on taxes

"I feel that the people of California have been punished enough. From the time they get up in the morning and flush the toilet, they are taxed. Then they go and get a coffee, they are taxed. They get into their car, they are taxed. They go to the gas station, they are taxed. They go for lunch and they are taxed and [it] goes on all day long, tax, tax, tax, tax, tax."

-- Aug. 20, 2003,

at a news conference

"I don't think we should raise taxes. We don't need to punish people for the shortcomings of Sacramento."

-- June 7, 2006,

at a campaign appearance

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