Governor Opens Door to Taxation of Services : Budget: Wilson says a proposal by Assembly Speaker Brown is fairer than higher levies on income.

SACRAMENTO —  With so many political sacred cows crowding out possible solutions to the state’s monumental budget problem, Gov. Pete Wilson on Wednesday signalled one possible solution that still seems negotiable to decision makers: enactment of a landmark service tax on such things as legal fees, real estate commissions and plumbing bills.

Wilson, who continues to lengthen the list of tax measures he would veto, told reporters he considers a tax on services proposed by Assembly Speaker Willie Brown (D-San Francisco) “more equitable” than an increase in income taxes.

Even though Wilson stopped far short of endorsing the Brown tax proposal, his comments were different in tone than other remarks he has made in recent days.

Facing a revenue shortfall of $12.6 billion over the next 15 months, Wilson and legislators have been narrowing the list of possible solutions, rather than expanding it.

One by one, Wilson is picking off tax proposals raised by Democrats.

Democrats also have been boxing themselves in. For example, the Assembly Speaker and other Democrats have adamantly vowed to protect the basic aid promised to public schools and community colleges when voters approved Proposition 98 in 1988.

But, even with the winnowed list, the governor and Legislature still have a wide range of options before them.

Not counting the opposition to reductions in Proposition 98 school aid--an issue that appears to be far from settled--the governor and legislative leaders are still contemplating moves to shift responsibility for $2.3 billion in health programs from the state to counties, reduce benefits to the homeless, roll back living allowances to poor families as well as the aged, blind and disabled, trim support of Alzheimer’s disease treatment centers and independent living centers, and curtail job training programs for welfare recipients, to name a few.

There is also a wide range of tax options. Wilson in January proposed raising $1.8 billion by extending the sales tax to candy, snack foods, newspapers and magazines, and sharply increasing motor vehicle license fees. Since then, a wide variety of other tax proposals--at least $20 billion worth--have surfaced, ranging from a proposal to boost the top rate of the state income tax from 9.3% to 11%, to raising sales, insurance and other taxes.

Brown, even though he said Wilson’s proposal to cut Proposition 98 funding is “ludicrous,” added in the same breath that “I believe we are all in negotiation on all issues.”

Wilson, asked about the services tax, insisted that he still doesn’t like the idea of any tax increases. But he signaled a willingness to consider the proposal by the Speaker, saying it was “at least more equitable” than Brown’s proposal to raise income tax revenues by suspending or eliminating “indexing,” the automatic retooling of state income tax tables to reflect inflation. Indexing protects taxpayers from being forced into higher tax brackets when they get cost-of-living salary increases.

Wilson on Wednesday said he was adding indexing “to my veto list.”

As the debate continued, state Controller Gray Davis released a report showing that March revenue collections fell for the third month in a row. Tax money flowing into the state treasury is below what was collected during the first three months of 1990, Davis said. March tax receipts were down 9.4%, Davis said.

Proponents of taxing services say it would give the Republican governor and leaders of the Senate and Assembly substantial flexibility to deal with the current budget problem. Brown said the tax would generate about $7 billion annually if services were taxed at a rate of 7%, the current sales tax rate in many counties. But he has acknowledged that 7% might be too big a pill to swallow, and aides have said the tax could be as low as 3% and still go a long way toward solving the budget problem.

Each 1% of the tax would raise $1 billion to $1.3 billion, depending on the number of services taxed.

The only services not covered by Brown’s proposal are a broad range of medical, hospital and health-related counseling services. But aides said all other services would be fair game, including work done by plumbers, lawyers, accountants, architects, tailors, gardeners and domestics.

The tax would be tacked onto real estate commissions when homes are sold, be added to the cost of buying and selling stocks and bonds, increase the cost of auto repairs, and figure in untold other transactions in which consumers buy a service. Proponents of the tax also are contemplating placing state levies on such “services” as theater and amusement park tickets and hotel rooms.

The proposal still is taking shape and numerous problems must be overcome. For example, Brown is concerned about the potential impact on small-time service providers such as barbers, gardeners and domestics. There also is the problem of consumers who contract for legal and accounting services with firms outside California, as well as hardships on small companies that contract for services that compete against larger firms whose in-house accounting and legal staffs would not be taxed.

The tax was tried in Massachusetts and Florida, then quickly repealed because it was so unpopular. But 26 other states now tax services to some degree, with six of those states imposing the kind of broad-based levy Brown contemplates.

If it doesn’t fly here, Californians can expect to be nicked by some other form of higher taxes.

That’s because the magnitude of the budget problem this year is squeezing Wilson and the Legislature so hard that there is widespread acknowledgement that there will be not only a major tax increase, but also cuts in school funding, possible layoffs of state employees, and sharp reductions in many government services.

Senate President Pro Tem David A. Roberti (D-Los Angeles) told reporters that “huge numbers” of Californians are going to be affected by budget actions.

“The governor and the Legislature are in agreement: We are going to have to do some unpopular things,” Roberti said.

Other tax-increase options being debated in the Capitol include possible increases in the sales tax, a change in the way corporate property is valuated, and a long list of possible changes in income tax rates and brackets.

The standard rule of thumb is that a half-cent increase in the sales tax would raise $1.6 billion a year. An increase in the top income tax rate from 9.3% to 11% would generate $3 billion during the 1991-92 budget year. Limiting the 11% rate to single taxpayers earning $100,000 a year or more or taxpayers filing joint returns of $200,000 or more would bring in $1.3 billion.

Even if Wilson and the Legislature could agree on a half-cent sales tax increase, plus an income tax rate hike, they would still be far short of the $12.6 billion needed to bridge the gulf between the current level of services and the amount of money needed to finance them.

On the spending side, Wilson would like to take $2 billion from public schools and community colleges, a cut so deep that educators say the quality of instruction could not help but be damaged.

Already, spending reductions of 4%--representing about $800 million in programs--are contemplated. Brown, trying to protect school budgets, this week proposed to Wilson and other legislative leaders an additional 5% across-the-board reduction in state operations that would affect prisons, health, welfare and all state programs except schools, a reliable source said. “Willie’s proposal would absolutely decimate state operations,” said one knowledgeable Administration source. The two reductions combined would cut about $2 billion from the state operations budget.

Despite the flaws seen by detractors, Brown so far has sketched out the broadest attack on the budget problem. Wilson’s budget plan still is more than $5 billion short of balancing revenues and expenditures.