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The Special Election | PROPOSITION 76

Voters Reject Proposal to Restrict State Spending

The governor said tax hikes could be needed if the measure fails, but few in the Capitol agree.

November 09, 2005|Evan Halper | Times Staff Writer

SACRAMENTO — Gov. Arnold Schwarzenegger warned throughout the special election campaign that higher taxes might be unavoidable without his proposed controls on state spending. But even though voters did not heed him, few in the Capitol predict the Legislature will pass a tax increase anytime soon.

With most of the statewide vote counted, Californians on Tuesday were rejecting Proposition 76, the initiative that would have capped what the state can spend each year, by a double-digit margin.

But a tax increase "won't happen," said Assemblyman Keith Richman (R-Northridge), a moderate who is one of the few GOP lawmakers to openly consider raising taxes in recent years. "Next year's budget is too easy to balance without either side making difficult decisions."

Budget analysts and other lawmakers agree. The state is in better financial health than it has been in years, they say, even without the spending restraints the governor wanted.

Though lawmakers have been anticipating a shortfall of about $6.5 billion in fiscal 2006-07, state coffers already are flush with much more revenue than forecasters expected this year, thanks to a relatively strong economy. If that trend continues, the deficit could be cut in half by the time the deadline for approving a new budget arrives in June.

"By the time we start negotiating the [next] budget, the deficit could be two or three billion dollars less than it is now," said Assembly Speaker Fabian Nunez, (D-Los Angeles).

And lawmakers have more than $3 billion left over from the bond issue voters approved in March 2004 that could be used to help close the rest of the gap.

Those numbers have given Republicans in the Legislature the confidence to say they will be able to block any moves for a tax hike this year. Tax increases require the support of two-thirds of the Legislature, meaning at least eight GOP votes would be needed.

"Our caucus is simply not going to support a tax increase," said Senate Republican leader Dick Ackerman of Irvine.

Administration officials said Schwarzenegger has not yet decided what will be included in the budget he will unveil in January. Until election day, they said, he hoped the spending cap would pass, despite poll numbers showing a near-certain defeat.

"We're not going to prejudge," Department of Finance spokesman H.D. Palmer said.

Though pressure for new taxes might have eased in recent months, there are wild cards that could revive the prospect even though higher taxes won't necessarily be required to balance the budget.

Nunez said that if the governor's next budget does not restore some of the billions the state has borrowed from schools, Democrats could demand new taxes on the wealthy.

"The message the people are sending by defeating this initiative is that education is their No. 1 priority," Nunez said of Proposition 76, which budget analysts projected would have cost schools $4 billion a year. "If the governor does not follow the will of the people, we will not be shy about coming out and asking the wealthiest among us to invest more in education."

Democrats made the same demand in the battle over the current budget. Though Schwarzenegger never capitulated, political analysts say the fight left him bruised and played a significant role in his plunge in popularity this year.

Now, Schwarzenegger will be running for reelection in 2006. Democrats may see an opportunity to inflict political damage by demanding a tax hike on the rich to pay for school programs. Polls have shown that the public supports more education spending, and that there is popular support for raising taxes on the rich in at least some circumstances.

"The question will be how weak Democrats think the governor is going to be in the coming year," said Bill Whalen, a Republican political analyst. "They may think he's been weakened by the special election and would be willing to play ball."

And, there are forces outside the Capitol to consider.

Voters could decide to raise taxes on their own. Hollywood producer Rob Reiner is leading an effort to bring to the ballot next year a measure that would raise taxes on the wealthy to create universal public preschool. Advocates of healthcare for the poor, meanwhile, are pursuing separate measures that would increase taxes on cigarettes to fund new medical programs.

Some analysts say that if polls show those measures are likely to pass, lawmakers might decide to pass the taxes themselves first. Then they would control how the money is spent.

Whalen said: "It's something both Democrats and Republicans are going to have to think through."

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