Governor spurns new budget deal

By Jordan Rau and Patrick McGreevy

Dec. 19, 2008 12 AM PT

SACRAMENTO — Gov. Arnold Schwarzenegger on Thursday rejected an $18-billion plan the Legislature passed to ease the state’s financial crisis through higher gas, sales and income taxes and cuts to schools and healthcare.

Schwarzenegger, who for weeks has exhorted lawmakers to act to forestall a cash crisis, vowed to veto the package after Democrats used a series of legal maneuvers to push through $9.3 billion in taxes without any GOP votes. He called on legislators to return to the negotiating table.

It was not the taxes -- or the tactics Democrats used to pass them -- that Schwarzenegger said troubled him. He complained the plan did not go as far as he wanted to stimulate the economy.

“I need exactly what I recommended [for my] recovery package,” he told reporters an hour after the Senate and Assembly concluded voting following a tense legislative session. “I think they should stay here, work some more on this budget.”

Schwarzenegger said the Democratic plan -- which would speed up financing for more than $3 billion in public spending on construction related to hospitals, streets, housing, flood protection, parks and transit -- was “bogus.” He said the state also needs to ease environmental rules that can delay such projects and allow a greater role for private contractors in public building.

He also complained that it did not include an additional $1.2 billion in cuts to the state workforce and welfare programs.

“They thought I would sign it, that they could put the pressure on,” he said.

The governor’s move comes as the state is projected to run out of cash as early as February. And it came a day after the state’s financial straits forced officials to stop payments for nearly 2,000 public works projects. The suspension of that money could make it impossible for lawmakers and Schwarzenegger to jump-start construction even if the stimulus measures the governor seeks are passed.

Democrats accused the governor of keeping the state in financial jeopardy over fringe issues. The projects that Schwarzenegger would like to see privatized or fast-tracked and the program cuts he wants implemented, they say, make up only a tiny fraction of overall state spending.

“We gave him an $18-billion gift, and he tossed it down the toilet,” said Sen. Mark Leno, (D-San Francisco). “This is more about his ego than what is good for the state.”

Despite the veto threat, many in the Capitol expect some version of the package to survive.

Legislative leaders late Thursday had not sent their bills to the governor’s desk, according to Capitol staffers involved in budget discussions and are planning to reopen talks with the governor’s office in coming days.

“When the bus is about to go over the cliff, you don’t just pump the brakes once and give up,” said Democratic strategist Jason Kinney. “You keep pumping until the bus stops.”

If some version of the plan is eventually signed into law, it could still unravel.

Several Republican lawmakers and antitax advocates said they would file a lawsuit charging that the plan violates Proposition 13’s provision that all tax increases require a two-thirds vote of the Legislature.

They also threatened to launch a referendum to overturn the proposed increase in the 13-cent-a gallon gas tax, which is scheduled to take effect in February.

“Let’s just have the signature gatherers stand at the gas stations and see how long that takes to get the signatures on a referendum,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn.

Qualifying the referendum would require 433,971 signatures. Once they were collected and validated, the increase would be suspended pending a vote of the electorate.

Legal experts said it was unclear whether courts would overturn other parts of the Democrats’ package in the event that the governor were to sign it.

The proposal would raise $9.3 billion by increasing sales taxes three-fourths of a cent. It would add a surcharge of 2.5% to everyone’s 2009 state income tax bill. It would also require businesses to withhold taxes on payments above $600 made to independent contractors, as they are now required to do with salaried employees.

In addition, it would cut $7.3 billion from schools, healthcare and other programs. Their package would nearly halve the state’s budget shortfall, projected to reach $41.8 billion in the next 18 months.

The Democrats circumvented Republicans through a number of novel maneuvers that took advantage of the legal difference between taxes and fees and skirted the need for a two-thirds vote of the Legislature, which is normally required for tax hikes. A two-thirds vote would have required some Republican support, but GOP lawmakers have vowed not to raise taxes. On the floors of the Senate and Assembly, Republicans said the Democrats showed contempt for voters and an unprecedented subversion of California’s Constitution.

“Once this approach is adopted, there will be tax after tax after tax,” said Sen. George Runner (R-Lancaster).

Senate GOP leader Dave Cogdill (R-Modesto) said the Democrats’ holiday message to voters was, “We certainly hope you got most of your Christmas shopping out of the way . . . because you’ve got another big bill coming.”

Democrats said the Republican alternative, to make $22 billion in cuts, almost half of that in school spending, would ruin the basic functions of California’s government and intensify the state’s economic troubles. They said GOP intransigence on tax increases had given them no other option.

“We have a fiscal crisis, and if we do not act, the No. 1 job killer in the state will be the fiscal crisis,” said Assemblywoman Noreen Evans (D-Santa Rosa).

For some Democrats, the act of bypassing Republicans appeared almost cathartic after years of frustration on both sides over negotiating state spending plans. GOP lawmakers have routinely blocked budgets.

“Today, democracy reigns in the state Legislature,” said Sen. Gil Cedillo (D-Los Angeles). “Today, we end the tyranny of the minority. No longer will we be captured by ideologues who don’t respond to their responsibility.”

jordan.rau@latimes.com

patrick.mcgreevy@latimes.com

Times staff writer Michael Rothfeld contributed to this report.

(BEGIN TEXT OF INFOBOX)

Budget relief

Key portions of the Democratic package to ease the state’s cash crisis:

NEW REVENUE (in billions)

3/4 -cent sales tax increase...$4.8

9.9% oil severance tax...$0.9

2.5% surcharge on all 2009 state income tax bills...$1.7

3% income tax withholding for independent contractors...$2.0

13 cent-a-gallon gas tax increase to 39 cents a gallon...$2.4