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Arnold the Taxmanian

Arnold Schwarzenegger is in the Governor’s Office, hefting the massive sword from Conan the Barbarian, slicing it through the air for the edification of a distinguished visitor (as distinguished from me) as he talks playfully about cutting the budget and slaying the beast that is strangling Kah-lee-fohr-nyah’s future. But will cuts alone work?

“Arnold has the same problem I had,” says Gray Davis, the man Schwarzenegger defeated in the recall. “Democrats resist program cuts, Republicans resist tax increases.”

The action-superstar-turned-governor has been asked point-blank, at two press conferences, to make a hard-and-fast pledge not to raise taxes. He has artfully declined to do so, despite having veered into anti-tax rhetoric in the recall campaign. Of course, there’s more to it. As it happens, scenarios exist in the Schwarzenegger circle for temporary tax increases. Indeed, signs are that the Republican stance against any such hikes has softened, though much cutting will ensue in any event.

Schwarzenegger’s demi-mentor Pete Wilson, who met for hours with him going through all the particulars of state policy just before he decided to run, raised taxes right away when he came into office confronted with a huge budget deficit. But though Arnold is certainly no lover of taxes, circumstances forced the ex–Mr. Universe’s hand in the campaign. Warren Buffett’s famous remarks on Proposition 13 nearly cost Schwarzenegger one of his few “issue anchors,” as his advisers called them, on the right, the Howard Jarvis Taxpayers Association endorsement, which he had to chase again for weeks because right-wing state Senator Tom McClintock wouldn’t get out of the race. He had appointed the liberal Buffett his chief economic adviser in part to subtly differentiate himself from Bush, who was then about to visit the state.

The truth is, Schwarzenegger had no budget plan in his campaign, just an artful dodge — “Here is my plan,” he intoned in a TV spot, “audit everything, open the books, and then we end the crazy deficit spending.” The Audit was supposed to find billions in waste, fraud and abuse. (His polling indicates that most voters think between one-quarter and one-third of the state budget is wasted spending, a fanciful notion that explains why most voters have not wanted either cuts or, with few exceptions, tax increases.) But The Audit as such never really took place, and was chiefly a mechanism to bring highly touted conservative Donna Arduin in from Florida as his state finance chief.

As Arduin began with her patented social-service cuts, Schwarzenegger ran into an immediate problem on cutting aid to the mentally disabled, a mushrooming state

program. So he backed down. He instituted

a long-range project called the California Performance Review, which is essentially

the real Audit, looking for ways to perform the same governmental functions more

efficiently.

Democrats and Republicans are happily working together on some of this, having just had a joint hearing presided over by Assembly Budget Committee Chairman Darrell Steinberg and Arduin on the program for the mentally disabled. A lovely sight, but there is hardly time to do that for the entire budget in the few months that are available this time.

Arduin, a humorous person behind an icy façade, is the most conservative member of the Arnold Cabinet and is the principal opponent of tax increases in his circle. She has good ideas on cutting state costs, including halting the end runs by which the prison system hired more than 1,000 workers without authorization and doing an inventory of state properties.

None currently exists.

She opposes tax increases, including temporary ones. “What is a temporary tax increase?” she asked me. (Wilson’s were temporary.) Sales taxes can have a negative effect on job growth, she says, but she did not cite any particular studies. She points out that many small businesses are taxed through the income tax, but did not say what share of the state’s economy they hold or what the actual effect of a temporary tax hike would be on them.

Schwarzenegger is a pragmatist who deals in scenarios. Not unlike Jerry Brown, who believes the new governor will inevitably raise some taxes, he knows where he wants to go but is fairly flexible about how he gets there. There are scenarios for temporary tax increases, notably sales or income, in his circle. A 1-cent sales-tax hike would raise $5 billion a year. Reinstating Wilson’s temporary increase on high-income individuals would raise a few billion. Higher taxes on tobacco or alcohol would raise more than a billion. One approach would be to simply include them in the budget deal. Another approach would be to place them on the ballot and let the people decide, just as the people decided on restructuring the existing debt and taking on additional debt to pay for the car-tax cut.

 

These scenarios are, of course, contingent on other developments. One factor is the massive defeat of Proposition 56, which labor spent megabucks on. The not so cleverly veiled attempt to lower the Legislature’s two-thirds vote requirement on budget and tax matters went down 2-to-1. Like Buffett’s inopportune remarks, labor’s unsurprising landslide loss has complicated matters, despite public-opinion polling showing support for some tax increases, notably on the wealthy and on tobacco and alcohol.

In the Schwarzenegger sequence of things, workers’-compensation reform comes next after Propositions 57 and 58 and before the budget. Each is contingent upon the other.

Despite his posturing, Schwarzenegger doesn’t really want to do a workers’-comp initiative. Waiting till November delays the benefit to the ailing economy for nearly a year. And he might lose. It’s complicated stuff. It’s not entirely clear what those TV ads look like. But he has to brandish the threat to get movement in the Legislature. Schwarzenegger tells me, “I am very confident on workers’ comp. We will have a deal.”

Republican legislators are uneasy, despite their public celebrations. They didn’t really get what they wanted with Propositions 57 and 58. They saw how Schwarzenegger gave in on the mentally disabled. Some are worried that he won’t be tough in negotiations on workers’-comp legislation. The stronger the deal he gets on workers’ comp, says one ranking Republican, the less they will scream at whatever he does on the budget.

Schwarzenegger insists he will get a strong deal in the Legislature. Even though a workers’-comp initiative would be a tough challenge for him, there are good political reasons for Democrats to deal. Some Republicans want a workers’-comp initiative to drain off big Democratic money from competitive legislative races. Indeed, the trial lawyers might put all their money into defeating the initiative. And labor has to defend against the Chamber of Commerce’s initiative drive to repeal Senate President Pro Tem John Burton’s landmark SB 2, which mandates that businesses with more than 20 employees provide health insurance.

Sensing diverging priorities in Democratic ranks, Senate Republican Leader Jim Brulte and other Republicans are urging Schwarzenegger to make transportation projects the top priority for any new state revenues discovered in the May revision of the budget forecast, a sweetener for building-trades unions helpful in workers’-comp negotiations.

There are other contingent factors. There will probably be one large tax increase that is not temporary. On the Indian casinos. Word is that the negotiations are going well. So the new revenue from the casino tribes and the overall state-revenue picture are important contingencies. At the moment, state revenues look to be running below expectations, contrary to what Arduin told me. A tax amnesty is on the table that could raise hundreds of millions. Another factor is how well contract negotiations with the prison guards and other state employees go. Despite what the guards have said, they are feeling the heat on several fronts and are dealing. But the atmospherics on those negotiations don’t seem as positive as those with the casino tribes.

 

While the budget deficit is close to $15 billion, the ultimate problem may be nowhere near that large. Between very possible reductions in spending for local government, transit, K-12 education, higher education and prisons, plus partial borrowing for pensions, some new revenue from Indian casinos and a few billion from the deficit bonds, the problem looks more like $6 billion. There the going gets tough, with bloodier cuts in health and welfare.

Brulte, whose threat of retribution against any Republican who voted for a tax increase did much to destabilize Davis’ governorship, is not nearly so militant this year. He’s optimistic about a legislative deal on workers’-compensation reform, which he prefers to talk about, although he does say he believes the budget can be balanced without any tax increases.

A key Schwarzenegger ally, Brulte is termed out of office after this year and will turn over the party-leadership post in a few months to Orange County Senator Dick Ackerman, who repeats the party line about no new taxes and says he doubts the budget will be done early as Schwarzenegger would like.

The Republicans’ line in the sand against any tax increase may be eroded by winds of change. Indeed, Senator Bruce McPherson, the party’s 2002 nominee for lieutenant governor, has already voted for a tax increase on transnational corporations pushed by Treasurer Phil Angelides. New Assembly Republican Leader Kevin McCarthy backs a depreciation schedule on the vehicle-license fee that could be construed as a tax increase. The open-primary initiative, which would enable centrists to do better in legislative races, is also a factor for Republicans contemplating tax increases.

In this situation of many scenarios, here is one that is set: It will be a while before it gets any simpler.


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