SAN FRANCISCO - California Democrats, who control both houses of the Legislature, yesterday moved to push through a budget plan that would cut the state's two-year, $41.8 billion budget deficit by $18 billion without any Republican votes.
If signed by Gov. Arnold Schwarzenegger, the controversial plan would raise $9.3 billion in taxes without any Republican legislators' votes. It skirts the California Constitution's requirement of a two-thirds legislative majority for new taxes by reclassifying some existing taxes as fees and increasing other taxes by the same amount.
Republican Assembly Leader Michael Villines, R-Modesto, called the move illegal "trickery," and Jon Coupal, president of the Howard Jarvis Taxpayers Association, pledged to sue to block the tax hikes and to protect Proposition 13, the constitutional amendment that requires a two-thirds supermajority to raise taxes in California.
"We have had this vetted by very conservative legislative counsel," said Senate President pro tempore Darrell Steinberg, D-Sacramento. "As long as a single bill itself is revenue neutral, it only requires a majority vote."
There's nothing revenue neutral about $9.3 billion in new taxes and fees, Coupal said.
Democrats say their package is legal because most of the new revenues are fees, not taxes. The distinction between taxes and fees has been endlessly debated and litigated since California's Proposition 13 passed in 1978. Raising fees requires a simple majority vote, while hiking taxes requires supermajority support.
So Democrats have decided to introduce a tax package that eliminates the state gasoline tax and replaces it with a 2.5% income tax surcharge that will raise $1.65 billion over the next 18 months, a 9.9% oil severance tax that will raise $855 million and a one-half percent sales tax increase that will raise $3.3 billion.
The tax package is revenue neutral, so it doesn't require the two-thirds majority necessary to raise taxes, Democrats contend.
The plan would also undo part of the "triple flip" that allowed it to take one-quarter cent from local sales taxes to support the state's 2004 economic recovery bonds. The state would continue to take local sales taxes to pay the bonds, but it would no longer replace the money for local governments, triggering an automatic increase in the local sales tax.
There's no state tax increase there, Democrats say, just a $1.6 billion spending cut, and they only need a simple majority vote to pass spending cuts.
The final major part of the Democratic revenue plan is a massive new fee to replace the gasoline tax. The new 39-cent-a-gallon gasoline fee will fund the state's transportation spending.
All told, these and a few minor provisions will raise $9.3 billion without officially raising taxes, Democrats say. Republicans promised to raise a ruckus when the plan came to the floor of the Assembly and the Senate, but Democrats repeatedly delayed the vote on Wednesday night, as they tried to win the support of the Republican governor. The Legislature was scheduled to reconvene yesterday morning, but pushed that back to midday, as behind-the-scenes negotiations dragged on.
"This drill is a direct assault on the California Constitution that will not be tolerated and any legislator who votes for this is violating their oath of office," Coupal, head of the powerful anti-tax group, said in a statement.
Schwarzenegger is at war with his own party's lawmakers because they refuse to consider tax increases, in large part because they pledged to never raise taxes when they ran for office. But the governor was reportedly balking at the lack of long-term economic stimulus - relaxed business and labor regulations - in the Democratic proposal Wednesday night.
He has also been pushing for long-term fiscal reforms that would limit spending during expansions to prevent future fiscal crises when the state's volatile economy slows. His representatives were still noncommittal yesterday at press time.
"We'll see what kind of package the Legislature puts forward and evaluate it on its merits," said H.D. Palmer, a spokesman for the governor's Department of Finance.
In addition to new taxes, the Democratic legislation includes $7.3 billion in spending cuts and $1.5 billion of interfund transfers. The spending cuts include about $4 billion in K-12 education spending, $446 million in higher education spending, $657 million in employee compensation, $312 million in local education spending, and $700 million in aid to welfare and disability payments.
California faces a $14.8 billion deficit in its $103.4 billion fiscal 2008-2009 general fund budget, and financial officials expect the gap to grow to as much as $25 billion next year. Lawmakers continued to struggle to find agreeable solutions to the budget crisis, which is sure to require deep cuts in public services and which Democrats and Schwarzenegger say also require tax increases.
Democrats have previously put forward packages that failed to garner GOP support and would have required a two-thirds majority to pass the Legislature because they combined acknowledged tax increases with spending cuts in nearly equal measure.
Republicans this week put forward a budget plan that would have reduced the deficit without new taxes by making deep cuts in education and social services. Their plan drew no Democratic support.
Facing a deadlock and increasingly dire warnings from state fiscal officials, Democratic legislative leaders on Wednesday floated the idea of a bill that wouldn't require a two-thirds majority.
Controller John Chiang earlier this month said he expects the state to have more bills coming due than cash coming in by the end of March, possibly forcing the state to delay payments or issue IOUs to pay income tax returns and to pay vendors.
Standard & Poor's last week lowered its rating on the state's $5 billion of outstanding revenue anticipation notes to SP-2 from SP-1, effectively cutting off short-term borrowing options. It also placed the state's long-term general obligation and general fund lease appropriations debt on CreditWatch negative.
The California Pooled Money Investment Board earlier this week cut off $3.8 billion of interim financing for capital projects at schools, hospitals, fire stations, and other public facilities to conserve cash for the general fund.
Under the circumstances, the Democratic plan was greeted with relief by Treasurer Bill Lockyer. He is a Democrat, but he harshly criticized the "banana republic" budget lawmakers passed in September. That budget was soon shown to be out of balance. He said the new plan is better.
"If enacted, it would send a positive signal of progress to the market," said Tom Dresslar, Lockyers's spokesman. "We see it as a big step toward the complete solution the state ultimately needs to get back in the business of selling bonds and getting the money flowing again to the infrastructure projects so vital to injecting life into our economy."
As of press time yesterday, lawmakers were debating the Democratic legislation in both the Assembly and the Senate.
"If it's rejected, it would put us in worse shape that we are today because it would show the market that we still can't muster what it takes to even start down the road to fiscal recovery," Dresslar said.
