Democrats propose tax hikes in response to Schwarzenegger’s fiscal plan

Reporting from Sacramento

The Democrats who control the Legislature have fired their opening salvo against Gov. Arnold Schwarzenegger’s spending blueprint, which proposed eliminating California’s welfare program and cutting deeply into other state services, by proposing that the state rely instead on billions of dollars in new taxes to balance the budget.

The Assembly’s Democrats detailed a plan Tuesday that would tax oil companies and borrow billions from the nickel-and-dime deposits that consumers make on recyclable bottles and cans. Tax breaks for businesses that are scheduled to take effect soon would be delayed under the plan.

A day earlier, Democrats in the Senate had begun debating a nearly $5-billion tax plan that would delay the same corporate tax breaks and extend both a hike in personal income taxes and a reduced dependent-care credit that are set to expire in December. Vehicle license fees would rise by $1.2 billion. Taxes on alcohol would increase 60%.

Despite the competing plans, Democrats in both houses agree that the deficit has grown so large — at $19.1 billion it is now roughly 20% of the state’s general fund — that any rational plan to close it must include tax increases.

“We have to stop thinking we can afford to provide the amount of services that the state’s residents expect for less money,” said Sen. Gil Cedillo (D- Los Angeles). “That’s just not going to happen.”

But tax hikes require some Republican votes, and with five weeks until the start of the next fiscal year, the Legislature and the Republican governor have now publicly staked out budget negotiating positions that are very far apart.

Schwarzenegger’s office immediately dismissed the Democrats’ proposals.

“It is unfortunate that the Democrats’ first instinct is to raise taxes,” said Schwarzenegger spokesman Aaron McLear.

Republican legislators also rejected the tax hikes.

“Asking people to dig deeper to support a chronically broken bureaucracy that is faced with a $19-billion budget deficit is just plain wrong,” Senate Budget Committee Vice Chairman Bob Dutton (R- Rancho Cucamonga) said in a statement.

Kevin Eckery, a Sacramento-based GOP political strategist, said all sides are posturing.

“At this point, it’s clear everyone’s just maneuvering,” he said. “We’re no more going to eliminate welfare in California than we are going dumpster diving for bottles and cans to pay our bills.”

Schwarzenegger’s austere budget outline, released May 14, contained no new taxes. Beyond the elimination of California’s welfare program, the governor would trim $2.8 billion from K-12 schools, slash child care for low-income families and reduce in-home care for the elderly and disabled.

On Tuesday, Assembly Speaker John Pérez (D-Los Angeles) tried to frame his plan as the better one for California’s beleaguered economy. The governor’s proposed cuts, he said, would cost California billions in federal matching money and 430,000 jobs, “further decimating the economy just as we’re beginning to recover.”

The Assembly plan centers on raiding the state’s recycling fund for the next 20 years and going to Wall Street for an $8.7-billion loan. The state would then levy a nearly 10% oil severance tax to help pay off the loan.

The scheme would not require Republican support, according to Pérez’s staff, because it engages a complicated raising of one tax and lowering of another that would skirt the state’s requirement of a two-thirds vote of the Legislature to raise taxes.

Pérez called the approach “unique and creative.” McLear described it as “legal gymnastics.”

Under Pérez’s plan, the infusion of borrowed money would allow Democrats to cast aside almost all of Schwarzenegger’s proposed service cuts. But the state’s bloated deficit would reemerge the following year.

Assemblyman Jim Silva (R-Huntington Beach) said the plan was evidence of “the same old smoke and mirrors that has caused the state to limp along for years.” If the Democrats try the maneuver, he said, it would be followed by a wave of “legal challenges.”

The Senate Democrats’ approach is more straightforward. It would plug roughly a quarter of the state’s deficit with tax increases.

The 60% hike on alcohol taxes would bring in $210 million. The vehicle license fee would grow from 1.15% of a vehicle’s value to 1.5%. A $220 cut in the dependent-care tax credit would be extended, raising $430 million. A surcharge of 0.25% on personal income taxes, set to expire at the end of 2010, would continue throughout 2011 to bring $1 billion into state coffers.

The delay in business tax breaks would allow the state to collect an additional $2.05 billion in the coming fiscal year. The Assembly plan counts the same savings.

Assembly Budget Committee Vice Chairman Jim Nielsen, a Republican from Gerber, said more taxes got the state “in the mess we’re in today,” and he hoped the latest proposals were not the “Democrats’ last, best offer to Republicans.”

The plans, he said, are “doomed to failure.”

shane.goldmacher@latimes.com