Gov. pushes hike in sales tax, big cuts

Halper and Rau are Times staff writers.

Gov. Arnold Schwarzenegger unveiled a plan Thursday for a steep sales tax increase, new levies on alcoholic drinks and the oil industry, and deep cuts in services to wipe out a budget shortfall that is expected to swell to more than $24 billion by mid-2010.

The linchpin of the plan is the sales tax increase -- 1 1/2 cents on the dollar -- that could raise $10.8 billion through fiscal 2009-10. In Los Angeles County, where voters Tuesday appear to have passed a separate half-cent sales tax hike to fund transit projects, the rate would shoot up to 10.25%. The statewide sales tax rate is now 7.25%.

Republicans, who blocked a smaller increase proposed by the governor last summer, immediately vowed to resist his latest plan.

The plan also calls for extending the sales tax to appliance and furniture repairs, vehicle repairs, golf fees, veterinarian services, amusement parks and sporting events. Schwarzenegger proposed a 9.9% tax on the extraction of oil within the state, the expansion of sales tax to some services and a 5-cent-per-drink tax on alcohol. His plan also includes a $12 increase in annual vehicle registration fees.

The rash of tax proposals comes as California is again headed toward a cash crisis. Administration officials said the state will not have the funds it needs to cover its bills by March if action is not taken quickly. The state is starved for cash as the economy continues its downward slide and the stock market plunge takes its toll on income tax collections.

"We are living in a different world now," Schwarzenegger said at a Capitol news conference. "We have a dramatic situation and it takes dramatic solutions."

His solutions include a number of significant spending reductions, the biggest of which is an immediate $2.5-billion cut from schools and community colleges. And state workers would be required to take a day off without pay each month, as well as to sacrifice two of their state holidays.

And the governor proposed canceling dental insurance for poor adults on the state's MediCal program and lowering subsidies to the aged, blind and disabled. California's welfare subsidies also would be reduced.

Schwarzenegger opened an emergency session of the sitting Legislature on Thursday to deal with the budget shortfall. Lawmakers will have until the end of the month to take action. The new class of lawmakers, elected Tuesday, will take office Dec. 1.

Legislative leaders expressed little optimism that the state could bolster its finances by month's end. Assembly Speaker Karen Bass (D-Los Angeles) and Senate leader Don Perata (D-Oakland) said it was Schwarzenegger's responsibility to find Republicans who will vote for taxes. A tax increase requires a two-thirds majority of the Legislature, meaning at least eight GOP lawmakers under the current makeup of the Assembly and Senate.

The governor was unable to round up GOP votes for the smaller tax hike he proposed last summer. And no Republicans stepped forward Thursday to support the latest plan.

"Raising taxes is the worst thing we could do right now. It will devastate an economy that is hanging on by a thread, threaten jobs and hurt working families," said a statement by Assembly Republican Leader Michael Villines of Clovis and Senate Republican leader Dave Cogdill of Modesto.

Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks) said any tax increase would "prolong the recession."

The governor, however, said he was confident that some GOP lawmakers would come around.

"Everyone here has gotten a wake-up call" as revenue has plunged, he said. "We are running out of money."

Schwarzenegger, who has repeatedly said during his tenure that the state's problem is overspending, not a revenue shortage, reversed course Thursday. The stock market declines, soaring unemployment and the housing bust, he said, are crippling cash flow and more tax revenue is essential.

Democrats embraced that message but balked at the governor's proposed spending cuts, saying they would be too big a blow to the state's poor and middle-class. Neither they nor Republicans offered their own plan to close the $24-billion budget gap.

Many of the new taxes and program cuts the governor wants have been proposed before and rejected by lawmakers or voters. Taxes on oil companies, nickel-a-drink proposals, extending the sales tax to services and events, and a statewide sales-tax hike have all stalled at the ballot box or in the Legislature in the recent past.

Deep cuts to schools were recently fought off by educators, who are preparing to fight again.

State Supt. of Public Instruction Jack O'Connell said Schwarzenegger's latest proposal would cause a "catastrophic disruption in our schools and harm to our students in the middle of the school year."

Public employee unions are also gearing up.

"He is unfortunately again using the budget crisis to attack the hard-working men and women who are California's economic engine," said Courtni Pugh, executive director of the Service Employees International Union's California State Council.

And advocates for healthcare for the poor are mobilizing too. The latest proposals are familiar to them, including the plan to eliminate dental, vision and podiatry coverage for many recipients of Medi-Cal, the state's healthcare program for the poor.

The governor's plan to require some adults who earn 72% to 100% of the federal poverty level to pay for a portion of their Medi-Cal coverage is also not new.

"He's saying that a family of three making $14,000 a year would be too rich to get basic Medi-Cal coverage," said Anthony Wright, executive director of Health Access of California, a consumer advocacy group.

The governor is also proposing to cut grants to welfare recipients and the disabled, food stamps and some medical programs for legal immigrants who are not yet citizens. And he again has recommended scaling back the state's In-Home Supportive Services program, which provides personal assistance to the elderly, blind and disabled in their homes.

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evan.halper@latimes.com

jordan.rau@latimes.com

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Times staff writer Patrick McGreevy contributed to this report.

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(BEGIN TEXT OF INFOBOX)

Combating a cash crisis

Gov. Arnold Schwarzenegger wants the state take "dramatic" measures to close a budget shortfall that is expected to swell to $24 billion in mid-2010. Among them:

TAXES

Hike the state sales tax by 1 1/2 cents on the dollar.

$10.8 billion

Extend sales tax to include several services and event tickets.

$1.5 billion

Tax oil companies 9.9% on every barrel of oil extracted from California.

$1.7 billion

Tax alcoholic beverages 5 cents per drink.

$878 million

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CUTS

Numerous reductions in K-12 and community colleges.

$2.5 billion

Reduce welfare grants for the elderly and disabled.

$1.4 billion

Require state employees to take one day off per month without pay.

$714 million

Eliminate parole for all but violent, sexual and other serious offenders.

$614 million

Require some adults earning 72% to 100% of the federal poverty level to pay for a portion of Medi-Cal coverage.

$451 million

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Source: California Department of Finance

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Sales tax hike could backfire

The proposed rate increase, to 8.75%, could drive consumers to buy in other states. PAGE A27

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