dssmith@sacbee.com
Sacramento Bee
December 18, 2008

Gov. Arnold Schwarzenegger said he will not sign a package of bills Democrats sent him today to increase taxes and make program cuts, an $18 billion effort passed without Republican votes.

The governor said the package did not include provisions to stimulate the economy by loosening environmental standards, making more use of contractors on public projects and give him flexibility to furlough state workers without union intervention.

Republicans claimed the Democratic package was illegal because it raised $9.3 billion in taxes without a two-thirds vote. But Schwarzenegger did not criticize that approach.

The state Senate and Assembly made their way through the package of bills required for the maneuver, voting along party lines on tax increases while jointly backing other proposals to hasten public works spending. Republicans opposed the tax proposals and accused majority Democrats of breaking the law.

By adroitly stitching together proposals that lower some taxes and raise others, Democratic legislators contend the package is "revenue-neutral" and thus could be passed by a simple majority rather than the constitutionally required two-thirds vote for tax increases.

The plan would raise taxes on gasoline, personal income and sales; cut state spending on schools, state universities and programs for the needy; and lower the state's payroll by $657 million. The state Assembly sent its first significant tax shift proposal, Assembly Bill 2x, to the governor this afternoon on a party-line 46-27 vote.

Whether the attempt is moot will be decided by Schwarzenegger, who could veto the plan.

Schwarzenegger administration officials turned thumbs down on a first draft of the plan released midday Wednesday, saying the governor wouldn't approve a package unless it relaxed state workplace and environmental laws to expedite public works projects. They withheld comment Thursday, preferring to see first which proposals the Legislature would send Schwarzenegger.

Democrats portrayed their plan as an inventive solution in a desperate time for California, one that comes as a last-ditch acknowledgement that Republicans may never vote for tax increases. They said Republican alternatives to raise revenues, such as asking voters to raid other dedicated state funds, were insufficient.

"Ask yourself this: Is there any other credible, politically acceptable plan put forward by anyone to make an $18 billion-plus dent in California's budget deficit?" asked Senate President Pro Tem Darrell Steinberg, D-Sacramento. "I think the answer is no."

But Republicans accused Democrats of subverting the will of voters and setting a historic precedent for raising taxes in California, calling the maneuver "stunningly cynical." They warned that Democrats would soon increase other fees to make up for budget shortfalls if they are successful in their majority-vote plan.

"This is a very historic day," said Senate Republican Leader Dave Cogdill, of Modesto. "Certainly we've been a long time coming to this point where we have reached such frustration with the laws of this state, with the people and their will as it relates to how taxes should be raised, that you've decided to take an unprecedented step. Something we believe, quite frankly, is illegal and will be overturned quickly in the courts."

Senate President Pro Tem Darrell Steinberg and Assembly Speaker Karen Bass said they were prepared to meet the governor "more than halfway" on his demands for meaningful economic stimulus measures.

The Democratic plan lawmakers began sending to the governor today included an acceleration of $3 billion in public works bonds already approved by voters. It also attempted to accommodate Schwarzenegger on the relaxation of some environmental regulations to speed up construction projects and rules that limit the use of private companies on public works projects.

But both leaders acknowledged they did not have a firm commitment from the governor for his signature.

The plan is meant to help bridge a shortfall projected at $40 billion over 18 months.

If signed by Schwarzenegger, it could soften the impacts of the state's decision Wednesday to halt funds for thousands of public works projects.

"We're committed to getting the job done with or without our Republican colleagues," Bass said.

Even if the governor goes along, anti-tax groups said they would sue to stop the tax increases. They also promised to ask voters to negate the gasoline fee.

Assembly GOP leader Mike Villines summed up the Democrats' approach as "raising taxes on people and playing funny math and calling it fees."

The Clovis Republican challenged an implication by Steinberg and Bass that GOP leaders had obstructed budget talks.

Steinberg said Democrats have made "every effort" to strike a bipartisan deal, but we "believe the higher responsibility is to govern."

In addition to not wanting to spend their holidays trying to patch the projected shortfall, legislators are trying to avert a much bigger problem.

State financial officials have warned California will not be able to pay its bills by the end of February unless there's a plan in place to at least partially close the deficit.

Democratic legislators contended their plan would do that by increasing tax revenues by the beginning of February and ratcheting down the bills the state will face by cutting program spending.

The $9.3 billion in tax provisions include a half-cent increase in the state portion of the sales tax and a quarter-cent hike in the local part of the tax; a 2.5 percent surcharge on personal income taxes starting in 2009; elimination of 26 cents per gallon in current gasoline taxes, replaced by 39 cents per gallon in fees, a 13-cents-per-gallon net gain; a new "severance tax" on oil production; and a new 3 percent income tax withholding requirement for payments to independent contractors.

The $7.3 billion in cuts include clipping $2.5 billion from spending on elementary and high schools and community colleges; $677 million from programs for the aged, blind and disabled; $132 million from the University of California and California State University systems; and $100 million from welfare programs.

Another $657 million in compensation to state employees would also be cut, although just how would be the subject of negotiations with employee unions, Democrats said.

Wednesday's action was the third time since just before Thanksgiving that Democrats have tried passing a package of cuts and tax increases. Two earlier versions, both of which required two-thirds approval, were squashed when no Republican would support them.

Democrats control 51 seats in the 80-member Assembly and 24 seats in the 40-member Senate. One Senate seat is vacant.

Call The Bee's Kevin Yamamura, (916) 326-5548