LA TImes: State Budget Talks Hit Impasse Over Tax Extension

California budget talks hit an impasse over three-month tax extension

GOP lawmakers might agree to let voters weigh in on taxes that are set to expire July 1, in exchange for state spending restrictions, changes to public pensions and new regulatory policies. Gov. Jerry Brown wants to extend the taxes until an election can be held in September.

California Sen. Minority Leader Bob Dutton (R-Rancho Cucamonga), left, talks with Sen. Tom Harman (R-Huntington Beach) at the state Capitol. GOP lawmakers have opposed Gov. Brown's proposal to bring tax extensions to voters in a special election. (Photo by Associated Press / June 6, 2011)

By Anthony York and Shane Goldmacher, Los Angeles Times

June 8, 2011

Copyright © 2011, Los Angeles Times

Reporting from Sacramento -- Republican lawmakers are prepared to let voters decide whether to close California's stubborn budget deficit with higher taxes in exchange for major changes in state spending, public pensions and regulatory policies.

But a week before the legal deadline for a spending plan, and with lawmakers' pay hanging in the balance, a final budget accord between Gov. Jerry Brown and Republicans remains elusive amid disagreement over which should come first — tax hikes or an election.

Both sides said Tuesday that the crucial stumbling block is a demand by Brown that Republicans extend current vehicle and sales tax rates to help balance the budget until voters have their say. Those rates will otherwise expire July 1.

Brown said such a "bridge tax" is necessary after talks on a June ballot measure collapsed earlier this year. Republicans said they were not willing to raise taxes themselves but would be willing to ask voters to do so.

"Right now, this tax question is the sticking point," Brown said in an interview Tuesday.

He and Republicans have largely settled, however, on a core package of policy overhauls to be enacted if a tax deal can be forged soon. Those include a new restraint on state spending to force California to use any future windfalls to pay down tens of billions of dollars in debt incurred by past budgets.

In addition, public employees would have the option of a retirement package that would include a 401(k), according to legislative staffers who spoke on condition of anonymity because budget negotiations are still in progress.

Also under discussion is a plan to require that the state produce a report on the economic impact of any new regulations before they can be etched into the state's books. Business groups and Republicans have long sought such a requirement to ward off regulations they say would hamper job growth.

The shape and scope of the concessions, however, is contingent on Republicans, Democrats and Brown reaching consensus on the taxes.

"There's no Republican votes for a temporary tax," said Bob Huff (R-Diamond Bar), vice chairman of the Senate Budget Committee. But "I think we're about to make history on meaningful structural reforms."

The spending proposal would set a cap for government expenditures until about $25 billion in state debts are paid off. Loans from Wall Street and money owed to schools, cities and counties would have to be repaid before other spending could grow, according to the legislative staff. Aspects still under negotiation include the economic formula that would determine how quickly, or slowly, spending could expand.

If a budget deal can be reached, it would also be likely to include curbs on such pension sweeteners as "spiking" — large pay increases shortly before retirement that dramatically boost pensions — and workers' ability to purchase credit for years they don't actually work, a practice known as "air time." A ceiling on the size of pensions and the option of a hybrid 401(k)-style plan for new state employees are also under discussion.

Brown and Huff both declined to comment on the details but concurred that talks on pensions, a spending cap and regulatory changes had been fruitful.

"We're very close on all those issues," Brown said. "We're not even arguing over these things."

But the tax issue — the linchpin of any deal — has been intractable. Brown asked in January for a June referendum on the taxes, but Republicans balked. Now they are agreeing to an election, but one cannot be held before the new fiscal year begins July 1.

Brown said Tuesday that he wants a vote in September, after lawmakers enact the increases as part of the budget.

Ratcheting up the pressure on lawmakers to craft a spending plan soon is a new law that will cut off their pay if they do not adopt a balanced budget by June 15. Huff said Democrats, who hold strong majorities in both houses of the Legislature, must meet that constitutional deadline without asking Republicans to raise taxes.

"There's a lot of different things they can do" to close the deficit, he said. "It's not our responsibility to find those things."

Brown suggested Tuesday that Republicans were being unreasonable. His budget plan includes billions of dollars in cuts to state services that have already been enacted, and the deal being discussed includes major policy changes that Democrats have long resisted.

"They're going to get their pound of flesh," Brown said of Republicans.