With Shortfall Mounting, California Budget Deal Is Stymied, Again

SAN FRANCISCO—Another chapter in the months-long partisan battle in California over how to address the state's growing $40 billion budget shortfall ended in controversy yesterday when Democrats railroaded an $18 billion budget package through the state legislature—skirting a state law that requires a two-thirds vote to increase taxes—only to have Gov. Arnold Schwarzenegger announce he would veto it.

Democratic leaders claimed their Republican colleagues, who have refused to agree to a tax increase during a recession, had left them no choice but to exploit a loophole in state law that allows the adoption of new taxes by a bare majority as long as the taxes are "revenue neutral."

With large majorities in both of houses of the legislature, Democrats introduced a complex set of bills that took advantage of this loophole by first eliminating some existing taxes and then offsetting the "loss of revenue" with new levies and "fees" on gas, income, and sales.

Accused of performing an end run around state law, Democrats fiercely defended their budget package, claiming Republicans had dragged out budget negotiations for months with their refusal to compromise. Democrats described the plan as the best way to save jobs and end California's economic death spiral, which has seen the state's budget fall $40 million further out of balance every day. "This is the only viable option before the people of California to make a dent in this deficit," Darrell Steinberg, the state's Senate majority leader, said at a news conference detailing the plan earlier this week.

Schwarzenegger, who has called the legislature into special session twice in the last month only to see budget negotiations stall, nevertheless refused to sign the bills. "I cannot sign this," Schwarzenegger said at a news conference immediately after the legislation passed. He criticized Democrats and Republicans alike, saying, "The whole country is looking at this state right now and saying this legislature is dysfunctional."

The Democrats' now defunct package would have created $9.3 billion in new revenue—raising the question of how it could be viewed as "revenue neutral"—while also cutting billions from education, state employee compensation, and other programs. The package would have closed just under half of the $40 billion budget shortfall the state is facing over the next 18 months.

Republicans, who refused to support any of the 13 bills in the package, accused Democrats of deliberately violating state law by circumventing the two-thirds vote requirement.

"What's going on here is historic, and . . . it's a step that I believe and my colleagues believe is illegal," Dave Cogdill, the Senate Republican leader, said on the Senate floor during the debate.

"Once this approach is adopted, there will be tax after tax after tax. It will be an endless stream," said George Runner, a Republican state senator. "It's outrageous."

Earlier this week, Cogdill and other Republican leaders proposed a $22 billion budget package without any tax increases that included $10 billion in cuts to K-12 education. Democrats considered the cuts unacceptable.

It is unclear exactly what the legal ramifications of the Democrats' budget plan might have been without Schwarzenegger's veto. After the measures passed, several taxpayer groups threatened to sue. But Senator Steinberg said on the Senate floor yesterday that the Office of Legislative Counsel, the public agency that provides legal services to the legislature, considered the budgetary end-run legal.

For the time being, anyway, the two sides will be forced back to the negotiating table—the same place they have been for months. Yesterday's hefty tax increases, which included a ¾ cent sales tax hike and 2.5 percent income tax increase, along with a new "fee" of an additional 13 cents per gallon of gas, are not likely to pass muster with any Republicans. Cogdill predicted the tax increases would add up to about $1,000 for a family making $60,000 a year. "California voters, taxpayers, Merry Christmas!" Cogdill said sarcastically on the Senate floor. "We certainly hope you've gotten your Christmas shopping out of the way."

Political observers are not optimistic about what will come next. Schwarzenegger told lawmakers yesterday to stay in Sacramento through next week's holiday, if need be. The state treasurer has said that without a budget deal, the state could run out of cash by February.

"The governor keeps saying it's Armageddon, and I think that's probably right," says Barbara O'Connor, director of the Institute for the Study of Politics and the Media at California State UniversitySacramento. "The tempers and the rhetoric are certainly at a boiling point. I don't know who blinks first."

According to a recent analysis by the National Conference of State Legislatures, the slowing economy has been drying up state tax revenues across the country, and state governments are currently facing a collective budget gap of at least $100 billion over the next year and a half. Remarkably, California is responsible for nearly half of that shortfall.