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Davis Seeks Tax Hikes to Bridge Gap

Budget: Levies would target drivers, smokers. Deep cuts in health programs for the poor are also part of package.


SACRAMENTO — Gov. Gray Davis proposed raising taxes Tuesday on smokers and motorists to help overcome what has grown into a $23.6-billion budget shortfall, saying there was no other way to protect schools.

The move reversed a promise Davis made in January not to ask for tax increases.

The tax hikes--an $84 increase in the average vehicle license fee and a boost of 50 cents per pack in the cigarette tax--would total $1.75 billion, according to Davis' estimates. But although they probably will account for most of the Capitol's budget debate in coming weeks, they represent only a share of Davis' plan to fill the budget shortfall.

Much of the gap would be closed by $7.6 billion in spending reductions, including deep cuts in health programs for the poor. Davis also relies heavily on various accounting shifts, budget transfers and loans, such as borrowing $4.5 billion against the state's future share of the national tobacco settlement and postponing some payments to schools.

His fourth budget as governor surely isn't the one Davis hoped to propose as he seeks reelection. It represents a dramatic reversal of fortunes in just two years. In May 2000, Davis presented a budget that featured an unanticipated surplus of $12.3 billion and offered tax rebates along with new spending on education and transportation.

The combination of cuts and new taxes outlined Tuesday would allow the state to protect spending on public education, meeting the voter-mandated guarantee of $47.2 billion for schools in the fiscal year that begins July 1, Davis said.

The governor defended his call for higher taxes, saying the size of the budget gap left him no choice.

"Twenty-four billion dollars crosses the line," he said. "I had to find other ways to close this gap. I'm not going to sacrifice the future of our children, particularly in public education. Without some revenue increases, I would have had to do that."

But the governor's plan puts Davis and fellow Democrats on course for a prolonged budget battle with Republican lawmakers.

The budget needs a two-thirds vote in both the Senate and Assembly to pass, so Democrats need at least four Republican votes in the Assembly and one in the Senate.

Senate Republican leader Jim Brulte of Rancho Cucamonga said he knew of no lawmaker in his party who would support the tax increases.

Timing of Hikes Is Questioned

In an apparent reference to the proposed increase in the vehicle license fee, which would not take effect until Jan. 1, Brulte said that if Davis really wants a tax increase, "he ought to have the political courage to propose that it take effect before the Nov. 5 election rather than after the election."

Republicans blame the state's fiscal woes on Davis' spending habits. By Davis' own account, general fund spending has grown by 32% during his first term in office. That represents lower growth than during all but two of the 10 previous gubernatorial terms.

Davis cited an economic downturn compounded by the terrorist attacks of Sept. 11 and the state's tax structure as reasons for California's fiscal headaches. He said the top 5% of taxpayers account for 70% of state revenues.

That structure lifted the state's budget during the dot-com boom and coinciding bull market.

The state is now feeling the flip side, however, since the burst of the Silicon Valley tech bubble and a downturn in the stock market, which has left wealthy Californians unable to take advantage of stock options or capital gains.

Revenues from the stock options and capital gains are expected to plummet from a peak of $17.6 billion in 2000 to $8.2 billion in 2001 and $7.2 billion this year.

The $23.6-billion shortfall estimate represents nearly a doubling of the state's budget woes since January, when California faced what was thought to be a $12.5-billion problem.

At that time, Davis called for $5.2 billion in budget cuts. The revised budget adds an additional $2.4 billion in cuts as well as the tax increases. New trims target libraries, mental health and juvenile justice programs.

Davis also proposed borrowing $4.5 billion against the state's tobacco settlement, nearly twice as much as the $2.4-billion sum he floated in January.

Senate Leader John Burton, the San Francisco Democrat, said he doubted members of his caucus would go along with cuts in crime prevention programs for juveniles.

"We're going to have to find the revenues and make it work," said Burton, who wants to raise taxes on high-income Californians. "Now that the issue of taxes is on the table ... it's like being a little bit pregnant. They are on the table and the need has been acknowledged."

Criticism Comes

From Tax Targets

The revised budget released Tuesday was quickly criticized by some of those who would be taxed, as well as some who would see their programs cut.

Philip Morris spokesman Tom Ryan criticized the cigarette tax, saying California smokers already pay some of the highest levies in the nation.

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