Gov. Arnold Schwarzenegger threatened last week to veto a bill that would reduce a corporate tax break, calling it a tax increase. He says requiring Amazon.com to collect tax dollars already owed is a new tax burden.

But he believes a new surcharge on property insurance is a "fee" that Californians ought to pay.

The Republican governor has pledged not to raise taxes in his final year in office, but whether that holds true depends on what your definition of a tax is. Legislative counsel already has drafted the insurance fee as a tax bill.

Since becoming governor, Schwarzenegger has learned that tax promises are situational when it comes to resolving the state budget.

Schwarzenegger spent his first term as an ardent opponent of new taxes. He won the recall election partly on a promise to cut the state's car tax, which he fulfilled his first day in office. Schwarzenegger also won re-election on a no-new-taxes pledge in 2006.

But with the state battered by the recession and facing a $42 billion deficit last winter, Schwarzenegger proposed new taxes on everything from alcohol to veterinary services. He ultimately signed $12.5 billion in temporary tax hikes on income, sales and vehicles, the last of which was the very tax he came to Sacramento to reduce.

The governor defended his switch by saying the historic downturn had become so severe that California had "a revenue problem rather than a spending problem."

"After watching Schwarzenegger over the course of several years, it seems he is philosophically opposed to raising taxes except as a last resort," said Dan Schnur, a GOP strategist and director of the University of Southern California's Jesse M. Unruh Institute of Politics. "People on different sides of the aisle might argue that the last resort has come too quickly or too slowly."

Anti-tax group unhappy

"From a taxpayer perspective, it was a knife in the back," Coupal said.

Schwarzenegger was never an anti-tax hard-liner. In the recall election, he opposed taxes but refused to sign a popular conservative no-new-taxes pledge because he said the state may need money in an emergency.

Still, the backlash to Schwarzenegger's actions last year influenced the governor's tack this year against more taxes. "It cost me a lot of pain with my party and with conservatives," he said in November.

Schwarzenegger and lawmakers know they have to cut programs to help balance a $19.9 billion deficit. They also remain desperate for revenue, so they are seeking cash streams that can avoid the "tax" label.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he is not proposing general tax increases, but not because he believes state programs don't deserve more revenue. His position is based on a strategic interpretation of the political landscape, in which Republicans oppose tax hikes.

"I just believe the smarter strategy and the strategy that has the greatest chance of success is to focus on the tax credit, tax loophole and tax expenditure side of the equation," Steinberg said.

As a result, most tax battles this year will take place around the edges, the murky areas that Democrats can describe as a rollback of corporate tax breaks or Schwarzenegger can describe as a fire fee.

The governor declared at his January budget news conference, "I refuse to raise taxes." But the budget document he released was not entirely free of tax hikes.

It suggested reducing tax benefits for businesses and the tax credit for dependents. He made those items, as well as deep cuts to many other government expenditures, contingent on how much money the state receives from the federal government.

Fee or tax?

"We consider it a fee," Schwarzenegger said in January. "I let some people debate over that – what's a fee and what's a tax. But I mean, I call it a fee."

Few in the Capitol agree. Republicans say it is a tax. The legislative counsel has drafted the governor's $200 million proposal as a tax in Assembly Bill 185, requiring a two-thirds vote.

"A fee is when there is a direct nexus between what someone is paying and what they are getting," explained Schwarzenegger spokesman Aaron McLear. "This will help with natural disasters in your neighborhood, and there is not a part of California not susceptible to natural disasters."

When lawmakers or the governor can justify a revenue as a fee, it requires only majority-vote approval. A tax, on the other hand, requires a two-thirds vote, including support from Republicans.

Two of the biggest interest groups in California could wage battle this year on taxes and fees. Mindful of the growing emphasis on higher fees, the California Chamber of Commerce is eyeing a ballot initiative that would more narrowly define what constitutes a fee, applying the two-thirds requirement more often. Searching for tax dollars, the California Teachers Association is gathering signatures for an initiative that would undo recent corporate tax breaks passed by the Legislature.

In the past two weeks, Schwarzenegger has criticized some Democratic proposals as tax increases.

As part of a complex gas-tax swap designed to raise $1.8 billion, Democrats have sought to roll back tax breaks for businesses that Republicans asked for in previous budget negotiations. Schwarzenegger's office said he opposes the gas-tax plan in part because the tax break provisions would increase taxes on businesses. Democrats point out that Schwarzenegger included the same rollbacks in his federal funding contingency plan.

Democrats also have proposed a change that would require Amazon and other online retailers to collect sales taxes if they employ California residents to generate business through referrals. Californians already are supposed to report and pay sales taxes of online purchases on income tax forms, but few do. Advocates say the plan would help brick-and-mortar retailers in state.

The California Chamber of Commerce opposes that idea, warning that Amazon would merely stop employing people in California and continue selling products without collecting sales tax, costing jobs. Schwarzenegger vetoed a similar proposal last year.

Democrats say the governor is inconsistent.

"When you look at the governor's history on these issues, he goes back and forth," Steinberg said. "He has himself proposed tax increases. In this budget proposal, he is proposing a clear tax increase with the emergency response initiative. … I just think we have to distinguish the political rhetoric from the terms themselves."

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.

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