Restraint on tax hike is advised

By Jordan Rau

Nov. 12, 2008 12 AM PT

Rau is a Times staff writer.

SACRAMENTO — While offering the grimmest forecast yet of California’s finances, the Legislature’s nonpartisan fiscal analyst recommended Tuesday that lawmakers pare back Gov. Arnold Schwarzenegger’s proposed 1 1/2 -cent sales tax increase and instead hike fees on cars.

In a new report, Legislative Analyst Mac Taylor forecast that the state would need to close a $27.8-billion budget gap during the next 20 months. That projection is more than $3 billion higher than the Schwarzenegger administration has estimated.

“The numbers are just truly awful,” Taylor told reporters. “There are no good options left.”

The analyst’s wider budget gap was influenced by the rapid decline in the state’s housing market. He projected that school districts would lose $1.5 billion over the next three years, requiring the state to fill that gap.

The economic downturn also has led to more people on health and social services programs. In addition, firefighting costs are higher than projected.

The governor last week called a special session of the Legislature and proposed deep cuts in services and tax increases to deal with California’s collapsing finances.

Though calling the governor’s proposal “credible,” the analyst said that raising the sales tax would further hurt the economy by discouraging Californians from buying products locally and instead shifting them to Internet purchases that escape the state sales tax.

Schwarzenegger’s proposed increase would make California’s sales tax, which varies from city to city, the highest in the nation, at an average of about 9.5%, the analyst said.

“That’s not something you want to be No. 1 in,” he said. Taylor recommended a smaller increase of 1 cent on the dollar.

The analyst favored increasing the annual vehicle license fee, from 0.65% of a car’s value to 1%. It is an idea that has traction among Democratic lawmakers, but one that Schwarzenegger has resisted.

His opposition to that fee was a main plank of his 2003 election, and he reduced the fee, then 2%, as one of his first acts in office.

The governor instead has proposed charging people an additional flat fee of $12 more when they register their automobiles each year. That would bring in only about a 10th of the $1.6 billion in revenue that a vehicle license fee increase would net.

The analyst said that without major changes, the state would run shortfalls on the order of $22 billion annually over the next five years even if the economy rebounded.

Taylor offered some variations to the $10.6 billion in cuts to schools, healthcare, welfare and transit that Schwarzenegger has proposed, but he endorsed the governor’s view that the severity of the budget gap requires both new revenue and program cuts.

“The magnitude of the problem has now reached such a level that we’re not clear how you could do one side or the other,” he said.

Shortly after Taylor spoke to reporters, Roger Niello (R-Fair Oaks), the ranking Republican on the Assembly budget committee, issued a statement saying, “We strongly disagree with the analyst’s call for higher taxes.”

Some GOP votes would be needed for the Democrat-led Legislature to pass any tax increase.

Meanwhile, Assembly Speaker Karen Bass (D-Los Angeles) on Tuesday urged the federal government to bail out states as well as banks.

“We think that with the state of California about to go over a cliff, we ought to be part of the bailout as well,” she said at a news conference. “Can we have $5 billion or $10 billion?”

The analyst said that although California should press for federal assistance, lawmakers should not count on or wait for such relief, which he estimated would probably not be more than $3 billion.

“If the state has any hope of developing a fiscally responsible 2009-10 budget, it must begin acting now,” Taylor wrote in his report.

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Times staff writer Marc Lifsher contributed to this report.