By Shane Goldmacher and Eric Bailey
Los Angeles Times
June 17, 20

Reporting from Sacramento — Setting up a contentious partisan showdown, a legislative budget panel approved plans Tuesday to boost oil and tobacco taxes, slash money for schools, eliminate the high school exit exam and reduce the budget for state prisons.

But in completing a budget blueprint to put before the full Legislature next week, the committee pulled back from some of the deepest cuts proposed by Gov. Arnold Schwarzenegger to tame California's $24.3-billion deficit.

The Democrat-controlled group, working into the evening, also voted to raise community college fees by $6 a unit, reduce court funding and slice social services for the poor.

But members declined to endorse Schwarzenegger's bid to eliminate some health and welfare programs altogether.

The most contentious vote came on the Democratic plan to hike taxes on the oil and tobacco industries.

The proposal, approved on a straight party-line vote by the six Democrats on the 10-member budget panel, calls for a new 9.9% levy on oil pumped from California soil, which would produce about $830 million in the coming fiscal year. It would increase the state's cigarette tax by $1.50 a pack, raising $1 billion. And the repeal of a corporate tax break approved just months ago would net $80 million.

But the levies on big business are anathema to the Republican governor and GOP lawmakers, who blasted the plan and vowed to block it.

"In the midst of the worst recession since the Great Depression, it makes absolutely no sense to solve our budget with proposals that target Californians' pocketbooks," said Aaron McLear, Schwarzenegger's spokesman

Assembly GOP Leader Sam Blakeslee said the proposal to raise taxes portends a battle between Republicans and Democrats that will "jeopardize the Legislature's ability to solve this crisis in time to avoid insolvency."

Even some Democrats who voted for the taxes expressed reservations.

"Californians are struggling to pay their mortgages, to pay their rent, to put food on the table," said state Sen. Alan Lowenthal (D-Long Beach), a panel member.

"The perception of the Legislature is that we can't live within our means," he said.

The panel also voted to impose a new 3% income tax withholding requirement for independent contractors.

Lawmakers said the proposal would speed the arrival of those funds and improve compliance, netting the state $2 billion.

Ana Matosantos, the governor's chief deputy finance director, said Schwarzenegger opposes the idea.

With Wall Street analysts considering yet another downgrade of California's credit and the Obama administration reiterating its refusal to guarantee loans to the Golden State, lawmakers on the budget panel rolled up their sleeves Tuesday with a renewed sense of the inevitable.

But although Assembly Speaker Karen Bass (D-Los Angeles) said the plan would close the state's entire deficit, other legislators and their aides said Tuesday evening they had not tallied their work.

"We're having a hard enough time ourselves trying to keep track of it," said state Sen. Bob Dutton (R-Rancho Cucamonga).

The panel voted to cut $4.5 billion from public schools, giving districts the option of shortening the school year by five days, rather than the governor's proposed 7 1/2 days, to absorb the loss.

Districts may retain the traditional 180-day school year if they want to cut in other ways. Regardless, California would have one of the shortest school years in the nation.

Lawmakers rejected the governor's call to eliminate CalWorks, though they cut the welfare-to-work program by $270 million. And the committee refused Schwarzenegger's bid to reduce by 5% the pay of the state's heavily unionized workforce, prompting an angry response.

The governor called it "outrageous" that Democrats would ask Californians to pay higher taxes while refusing to decrease state wages.

"This is exactly why so many Californians have lost faith in Sacramento's ability to solve problems," Schwarzenegger said in a statement.

Democrats defended the move, saying that state workers already must take two unpaid furlough days a month, equivalent to a nearly 10% pay cut.

Democrats countered with some budgetary sleight of hand. They voted to delay one month's payroll for all state workers in June 2010, pushing the expense into the next fiscal year. That accounting move would reduce the state's deficit by $1.2 billion, according to legislative aides.

"It sounds kind of cute, but it works," said Assemblywoman Noreen Evans (D-Santa Rosa), chairwoman of the budget committee.

The group shaved $117 million from the state-subsidized network of home-care workers who tend the elderly and disabled, a roughly 10% reduction.

Schwarzenegger wanted to cut the ranks of those workers -- most of them represented by unions that contribute heavily to Democrats -- by 90% to save $765 million.

The legislators also voted to cut $102 million from state courts, which equals the amount the state could save by closing every trial court for one day each month.

Prisons would be cut by more than $1.1 billion, but the panel didn't provide details on how to accomplish that.

Schwarzenegger had proposed lighter sentences and less costly custody arrangements for inmates serving time for lesser crimes, and early release and deportation of illegal-immigrant felons.

Some of Tuesday's decisions veered from big savings into setting policy, such as the plan to eliminate the controversial high school exit exam.

Some lawmakers and educators have been eager to see the exam abolished, saying that it unfairly penalizes young women and some minorities.

But eliminating it offers scant savings: between $5 million and $10 million from the $92-billion general fund put in place in February.

Supt. of Public Instruction Jack O'Connell said that eliminating the exam -- a graduation requirement since 2006 -- would bring the state "back to a relatively meaningless high school diploma" and cost taxpayers more in increased unemployment benefits and incarceration rates.

"This would be a giant step backward," O'Connell said.

shane.goldmacher@latimes.com

eric.bailey@latimes.com

Times staff writers Michael Rothfeld and Seema Mehta contributed to this report.