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Dire warning on state’s red ink

California needs to take dramatic action – perhaps by raising income taxes, limiting the home mortgage deduction or cutting off budget support for the University of California – or the state “could be in hole” by more than $14 billion in 20 years, state Treasurer Bill Lockyer warned in a report on Tuesday.

The governor and lawmakers have three options to balance the budget: raise revenue, cut costs or “take meaningful steps” to operate government more efficiently, the report said. In most cases, they will need to consider dramatic steps. One benefit is implementing them over a 20-year timeframe.

“Business as usual is not an option – not for our children and not for the next generations who deserve our best effort to build a better state,” said Lockyer. “We need to act now to shore up our financial house.”



Lockyer’s report, titled “Looking Beyond the Horizon,” is the latest and one of the most dramatic reminders of the need to make some tough decisions in government – still meeting resistance or falling on deaf ears in some political and administrative circles throughout California. The dour scenario also comes as the state and rest of the nation sit on the precipice of a recession.

Some lawmakers, including state Sen. Sam Aanestad, R-Grass Valley, predicted the state treasurer will use the 60-page report as a case for raising taxes. Lockyer said a combination of budget cuts and tax increases was the most likely solution. (See Nevada County’s response on A1).




Some steps lawmakers and the governor could take to balance the budget include:

• Ask voters to agree to pay for some public works projects with a statewide property tax.

• Increase the top income tax rates to 10 percent and 11 percent to generate annual revenue of about $4.5 billion. Other options include across-the-board income tax increases.

• Cut off state budget support for the University of California, requiring it to rely on student fees, donations or other revenue sources. This could save $7 billion by the 2027-28 fiscal year, the report said.

• Limit the home mortgage deduction to $35,000 to increase annual revenue by $460 million.

• Extend the sales tax to cover services such as auto repairs, construction, health and real estate, generating up to $36 billion a year if applied to enough industries.

“The state also could raise General Fund revenues by broadening the sales tax base, which is still tilted toward sales of goods, even though California’s economy long ago began a dramatic shift toward sales of services,” the report said. “For example, if California taxed construction services (such as carpentry) at the state rate of 5.25 percent, it would generate nearly $3.9 billion.”

Real-world sense

The report stressed that “neither the treasurer nor the treasurer’s office necessarily endorses any of these proposals.” It added, however: “We list them to provide a real-world sense of the financial effect any or all of the proposals could produce in the effort to solve California’s structural budget deficit.”

“The report doesn’t surprise anyone in the Legislature and the governor knew it,” Aanestad told The Union.

“I think Lockyer will use (the report) as a case for raising taxes,” the state senator said. He predicted Gov. Arnold Schwarzenegger will support a proposal for a state sales tax increase on next year’s ballot.

Aanestad added that the state budget impasse this year “could get even worse than last year.”

The report expressed some optimism that Californians are “pulling together to get the state back on track” despite the hard work ahead. It cited a $42.7 billion plan approved by voters in November 2006 to finance infrastructure construction.

A spokesman for Schwarzenegger’s Department of Finance, H.D. Palmer, called the report “thoughtful and thorough.” “It’s going to be a critical step,” he said. “It’s also going to be difficult.”

As for the University of California, any attempt to cut state support for the university would raise “real concern,” a spokesman said. The state provides about 20 percent of the university’s income now, he said.

A full copy of the report can be found at: http://www.treasurer.ca.gov/publications/2007dar.pdf.

The Associated Press contributed to this report.

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To contact Senior Staff Writer Dave Moller, e-mail davem@theunion.com or call 477-4237. To contact Editor Jeff Pelline e-mail jeffp@the union.com or call 477-4235.


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