Gov. Arnold Schwarzenegger said Tuesday the state should lower its sales tax rate and apply it to "all services" that now go untaxed.

The Republican governor, speaking to business leaders at the Goleta Valley Chamber of Commerce, framed the change as a way to stabilize California's tax system, which he said relies too heavily on income taxes paid by wealthy earners.

Schwarzenegger still opposes any idea that would result in higher taxes overall. He called for lower taxes on income and corporations as part of the sales tax change. He wants some overhaul of the tax system as a condition to signing the state budget, which is now 56 days overdue.

"Let's broaden it to all services, so that everyone pays taxes," he said of sales taxes, "not just half of the people pay taxes and the other half doesn't. … We know that the economy now is a service-oriented economy, but we really don't tax anyone that is in this new economy."

Schwarzenegger so far has rejected a Democratic tax plan to raise taxes on income and vehicles but lower the sales tax. The Legislative Analyst's Office has said that proposal would lead to higher taxes for middle-class residents in 2011-12. Democrats are drafting alternative scenarios that may not result in such a burden.

The governor's idea rests on the same concept as a plan issued last year by a bipartisan, 14-member tax commission. The plan called for a different mechanism – a 4 percent "business net-receipts tax" that firms would pay on revenues minus deductions for capital investments and contractors. The proposal would have captured more taxes from service industries.

Businesses rejected the idea because it was unproven and might result in higher costs for some companies. Labor unions feared that workers would lose pay and benefits.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, hasn't seen a new sales tax proposal, but he supports the concept of broadening the sales tax base, said his spokesman Nathan Barankin.

"If the governor can deliver some Republican votes, it's worth talking about," Barankin said.

Schwarzenegger himself proposed higher taxes on services in late 2008 when the state faced a $42 billion deficit as the economy was in free-fall. He proposed taxing everything from sporting events to auto repair. The proposals died amid heavy lobbying.

One business group, the California Taxpayers' Association, said it would oppose any effort to extend sales taxes to services. Spokesman David Kline said such taxes would raise costs on services while Californians are struggling.

"We don't think it's a good idea to start taxing even more things in California," he said.

Jean Ross, executive director of the California Budget Project, which advocates for low-income residents, praised the idea because she said a broader sales tax provides a more stable source of revenue. She said the state should focus on taxing services that are "final products," like repairs and health clubs.

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