Jerry Brown recasts tax push, targeting California's 'wall of debt'

With state revenues rising, Gov. Jerry Brown reframed his call for tax extensions Monday, saying they are still necessary to help the state whittle down an accumulated "wall of debt."

The Democratic governor announced that California can count on $6.6 billion in surprise tax revenues through June 2012, thanks to more money flowing into state coffers this year and a higher growth expectation for next year.

The deficit has shrunk to $9.6 billion against a current $91.6 billion spending plan, thanks to earlier cuts in health and welfare and the new cash.

But Brown still wants to maintain a higher tax rate on sales and vehicles, as well as a smaller income tax credit for dependents over five additional years.

He also wants to reinstate a 0.25 percent income-tax surcharge in 2012 for four years, while eliminating it for 2011. The governor wants all subject to voter approval "as soon as possible."

Schools, which had been bracing for doomsday cuts, now stand to gain $3 billion more than they are getting this year.

But Brown said even more revenue is needed to reduce debt the state accumulated in recent years due to borrowing and accounting tricks.

"We've got to pay our bills on time," Brown said. "It's not a good example for the state itself to be a scofflaw or to be always kind of cadging from local government or schools or charter schools. Or the people themselves. I think we've got to pay our bills. This is honest."

Republicans, however, said the state's improving outlook shows that the governor's tax package is no longer needed.

"With $6.6 billion in new revenues, Republicans are right – we don't need, and it's ridiculous to ask voters for, five years of new taxes," said Senate Republican leader Bob Dutton, R-Rancho Cucamonga, and Sen. Bob Huff, R-Diamond Bar, in a statement.

The governor's $34.7 billion "wall of debt" includes some pressing obligations, such as $1.9 billion in local government loans due next year. But it also contains items of lesser importance, such as an $800 million one-day paycheck deferral to state workers that hardly anyone expected to be reversed after the accounting maneuver was employed in 2009.

The governor now wants to direct $3.7 billion toward reducing short-term IOUs to schools and internal borrowing from special state funds. Brown's previous budget proposal relied on both forms of backdoor borrowing.

The reversals could help some school districts that struggled to borrow against short-term IOUs from the state.

But some of that money might have gone instead toward cutting the deficit further, especially if Brown were willing to suspend the state's Proposition 98 guarantee for schools while still providing their current level of funding.

That might have brought the deficit below $8 billion. But it would have been difficult for Brown to sell voters on the need for more taxes with an even smaller deficit. He proposed a reduced sales, vehicle and income tax package of $9.3 billion through June 2012.

"He still wants to have that approved one way or another by the voters," said Daniel J.B. Mitchell, a professor emeritus of public policy and management at UCLA. "The publicity about having more money than we thought back in January was working against that. That's why all that 'wall of debt' talk got brought into the story."

While the revenue spike has improved the state's immediate outlook, Brown said California still faces roughly $10 billion in annual deficits through the 2014-15 fiscal year. He made the case that the tax extensions are necessary to bring the state's budget into balance over that period.

Michael Genest, who served as Department of Finance director under Gov. Arnold Schwarzenegger when state leaders used many of the payment deferrals targeted by Brown, praised Brown for seeking to reverse some of the maneuvers.

"I would say he's using the additional money to clean up the books, which is what he said he wanted to do – to clear some of the underbrush," said Genest, whose administration argued at the time that the state needed every last solution in the midst of an historic downturn.

Genest also said he sees some politics at play.

"The subtext of that is pretty obvious," Genest said. "He doesn't want to take the pressure off the taxes."

Brown's budget led to mixed messages Monday from education lobbyists and school advocates. California Teachers Association President David Sanchez, one of dozens arrested during education protests last week at the Capitol, said in a statement the tax extensions are necessary "to prevent further drastic cuts to public education."

But Sanchez also said the governor's plan "should allow local districts to maintain current funding levels and rescind some planned program cuts and layoffs."

Meanwhile, the University of California and California State University issued statements saying that if the taxes don't pass, they are at risk of another $500 million cut to each system.

Deep cuts to public safety and health and human services were also mentioned in Brown's budget as "types of reductions" that could occur without tax extensions. But the governor himself was unwilling to commit to such possibilities during his press conference.

"I'm proposing what should happen," Brown said of his tax extensions. "If that's rejected, well, we'll go to Plans B, C and D. We're not going to try to anticipate, because there's a variety of things we can do."

• Read more articles by Kevin Yamamura

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