Sacramento mulls major fiscal overhaul

February 11, 2003

San Francisco Chronicle

Lynda Gledhill, Chronicle Sacramento Bureau

February 8, 2003

Sacramento -- Confronted with a huge budget deficit and the prospect of slashing popular programs and raising taxes, the governor and lawmakers have pledged to re-engineer the state's fiscal infrastructure.

While "structural budget reform" may sound arcane to anyone who doesn't wear green eye shades, it is likely to play a decisive role in this year's final budget deal that determines everything from how many schoolteachers get laid off to how high taxes go.

The call for reform is not new. Previous commissions and lawmakers have called for basic budgetary changes to avoid deep cuts in bad economic times and binge-spending in good times.

The problem is especially tricky in California. A progressive income tax structure (a family of four earning $40,000 who rents and takes the standard deduction pays no state income taxes) leaves the state heavily reliant on high- wage earners. And voter-approved initiatives have earmarked money for specific programs, limiting the flexibility of lawmakers and the governor.

"The question is how government sustains the programs it is currently running and how we make more rational and equitable a tax base that is over 100 years old in concept for an economy that is changing all the time," said lobbyist Phil Isenberg, a former assemblyman.

Suggested changes range from a spending cap to extending the sales tax to cover services, such as haircuts.

WEB TAXES

Taxing the Internet is an idea gathering steam from lawmakers and economists who believe it is a way for the state to take in more money without raising the tax rate.

Currently, online companies based in California are required to charge a sales tax -- but many corporations that have stores here avoid the online sales tax by setting up separate Internet companies out of state. Davis, who has vetoed legislation to tax the Internet in the past, now says he would support the idea, but only if the state moves in conjunction with a national plan.

Davis, who says a $34.6 billion deficit has to be erased over two budget cycles, started the debate this time by saying he won't sign a budget bill this year unless there are also agreements on reform.

His 2003-2004 budget plan, which proposes $96.4 billion in spending, offered just a few suggestions, such as allowing the governor to unilaterally make midyear cuts.

ATTRACTING REPUBLICANS

Some Democrats hope that linking the budget plan to long-term changes will help attract Republican support for the overall spending plan.

But the GOP certainly isn't thinking that way.

"That is not something I am interested in doing," said Assemblyman John Campbell, R-Irvine. "I think we can find structural reform issues that Republicans and Democrats can agree on without having to trade something to get there."

Still, Republicans may find that when confronted with a budget containing tax increases, getting their ideas for long-term reform approved may be a victory they can tout years into the future.

Davis has proposed a reserve fund that all extra money would go to and then be spent on onetime expenditures. But some lawmakers want to go much farther, suggesting a constitutional amendment that would cap state spending to equal the growth in population and inflation.

Under that proposal, if additional revenues come to the state's coffers, they would be put into a reserve fund. If the reserve were ever to exceed 10 percent of total state spending, the extra money would be split between a onetime rebate to taxpayers and a onetime payment to schools.

OTHER TAX IDEAS

Among the other reforms that have been floated are applying the sales tax to more services, restructuring income tax brackets and more frequent property tax assessments of businesses to more accurately reflect their values.

Republicans also are renewing their push for zero-based budgeting, which would force departments to justify every dollar they request, even for ongoing programs.

"Right now, you are rewarded for spending your money and punished if you don't," Campbell said. "That is never going to make for effective and efficient bureaucracy."

Assemblyman Joe Canciamilla, D-Pittsburg, said he will introduce legislation dealing with the process of budgeting, including bills that would require a state reserve fund and move to a two-year budget plan.

Many people say the state's fiscal system has been out of whack since voters approved Proposition 13, which limited local government's ability to raise property taxes.

"All the roots can be traced back to the legislative decision post- Proposition 13 to bail out local governments," said Steve Peace, Davis' director of finance and a former lawmaker.

With limits on property tax -- one of the most common ways for governments to pay for services -- the state had been relying on a hodgepodge of taxes and fees, including vehicle license payments, sales taxes and income taxes.

Meanwhile, voters have continued to approve initiatives that have tied the hands of lawmakers trying to balance the state's myriad needs. These include last fall's Proposition 49 that dedicated money to after-school programs, and Proposition 98, which mandates the amount of money the state spends on education.

"We cannot have fiscal matters decided by proposition," said Assemblywoman Jackie Goldberg, D-Los Angeles. "Otherwise, there will be an initiative to simply undo everything we do here."